The Union Government presents its budget within one week of us celebrating our Republic Day. It is, therefore, important that we assess the budget's resource allocation and mobilisation strategy in the context that our Constitution and the Directive Principles provide for us.
The directive principles require us to create opportunities for all of us to "have the right to adequate means of livelihood; ownership and control of the material resources of the community are so distributed as best to subserve the common good; the operation of the economic system does not result in the concentration of wealth and means of production to the common detriment, and; children are given opportunities and facilities to develop in a healthy manner and in conditions of freedom and dignity."
Enough opportunities to earn a living through meaningful work?
It is an undisputed fact that we have made only limited progress in creating opportunities for earning livelihood. Youth unemployment and under-employment continue to be high, women's workforce participation levels are low, and they are often stuck with low-paying work. At the same time, the quality of employment and consequently the quality of earnings has not got better for a vast majority.
Entry-level wages for white-collar workers in one of the most profitable industries (IT) have been stagnant for more than a decade. Gig and contract employment is growing faster than formal employment in most sectors.
The government has absolved itself of the responsibility of providing formal employment, as the number of people in government service is either declining and when hired, they too are on contract.
It is, therefore, not surprising that we are having to take solace in being the fastest growing major economy and not the society that is helping hundreds of millions of our youth to do meaningful work and build their and our collective future. If we are to live up to the promise that our directive principles make to all of us, we need a budget that mobilises the required resources and allocates them in manner that is consistent with these principles and our current needs.
Resource mobilisation
Is our resource pool expanding as our GDP expands?
The Union Government seems to believe that we either do not need additional tax resources or we must not borrow to invest, even when our current level of resource mobilisation (11.89% of GDP at Current Market Prices) through tax revenue is below the peak reached during the global financial crisis (12.11%).
At the same time, the burden of direct taxes has been moved from corporations to households. Gross tax revenue from corporations has declined from 3.70% of GDP to 3.02% of GDP. During the same period, the collections from households have more than doubled to reach a level of 3.89% of GDP—level that is significantly higher than the contribution that corporations make.
The corporation tax cut during November 2019 was meant to accelerate investment but promised investment boom is yet to appear. We discuss this aspect in detail later.
The union government's focus on fiscal consolidation is excessive given the level and quality of employment. The problem of fiscal consolidation gets solved if we can accelerate growth. Given that we do not rely on international capital, the domestic borrowing for a good cause does not cause any major fiscal challenges. The current internal liabilities for the union government are at 54.6% of GDP, much lower than the peak of 60.7% in 2004-05.
The argument that the government investment crowds out private investment too is not valid, as the private sector savings rate has got much better during the last few years, and the private sector is not willing to invest at this stage, as we will see later in this article.
In view of this analysis, it can be argues the budget must focus on the following:
• Reduce the direct and indirect burden on households and get the corporations, particularly the large ones, to pay their fair share of direct taxes. Bring parity in taxing equity and debt earnings at household levels.
• Enhance resource availability through tax on gains from speculative investments, e.g., real estate (other than primary residence), short-term capital gains on equity, debt, derivatives, and other financial investments.
• Be willing to borrow to invest in areas that provide households the opportunity to earn. Fiscal consolidation can wait till we are able to accelerate growth to the required levels and the household balance sheets get repaired.
Is the resource allocation by the Centre consistent with our needs?
Gross Capital Formation (GCF) is down from 39.0% of GDP during 2011-12 to 32.0% of GDP during 2023-24 at Current Market Prices.
GCF levels have declined in all sectors other than trade, railways, air transport, communication, public administration, and other services (residual). Sectors with the highest share (real estate, manufacturing, and utilities) have experienced biggest decline in investments.
At the same time, the government is spending an increasing amount of public money on incentives through various Production Linked Incentive (PLI) schemes, investment funds, technology upgradation funds, investment promotion schemes, etc.
PLI schemes were announced immediately after the corporate tax rate reduction, and they have not moved the needle on private investment. The union government spend on PLIs has gone up from about Rs 2,000 crores to over Rs 20,000 crores since 2019-20.
Is the promise of capex-led growth being realised?
On face of it, we do have the union government capital expenditure going up significantly during the last few years, up from 2.08% of GDP in 2011-12 to 3.14% in 2024-25, after adjusting for capital expenditure for railways. However, that is not the complete story. During the same period, the capital investment by public enterprises has declined from 2.29% of GDP to 1.21%. Once we add the expenditure for both these heads, we observe that there is no change in the level of capital expenditure. In fact, the level of expenditure has come down from 5.11% in 2017-18 to the current level of 4.35%.
Another aspect of capital expenditure that needs attention is the increase in expenditure for road and railways from less than 20% of the total expenditure during 2011-12 to 70% in 2023-24, down to 61.5% in 2024-25. Our question, therefore, is: is this expenditure helping households and businesses reduce their cost of doing business or the cost of living? We discuss this later in the article.
Our analysis above suggests that there has not been any significant change in capital expenditure level, expenditure has been allocated disproportionately to roads and railways, and public enterprises are playing much smaller role than they were playing a decade ago. We do know that many of our public enterprises (power generation and oil companies, for example) are good at managing their businesses, and, therefore, they deserve to contribute to our progress.
Capital Expenditure: Are Incentives delivering the required level of Expenditure?
Our capital expenditure is largely financed from domestic savings. However, there has been a decline in savings as well as capital formation during the last decade or so. The level of capital expenditure has fallen much faster than the level of savings. That is, the savings level has declined by 3.9%, however, the level of expenditure is down by 7%.
As for private corporations, the level of decline in expenditure is not explained by decline in savings. Savings rate has gone up (from 9.5% to 10.7%), but the expenditure level has declined from 13.3% of GDP to 11.2%. In short, the private corporations are now reluctant to invest.
At the same time, the households too have experienced a decline in savings of 3.1%, with capital expenditure declining by 5.5% (from 23.6% to 18.1%).
In short, the biggest contributors to capital formation are not investing at the same pace as earlier, with private corporations becoming much more reluctant to invest.
Is CapEx delivering productivity that can help us accelerate growth?
As the Table below suggests, the answer to our question of whether Capital Expenditure is delivering productivity that can help us accelerate growth is a simple no. While we do have sectors that have delivered higher productivity (e.g., agriculture, utilities, and high value-adding services), all other sectors have experienced a decline in capital productivity. In short, our capex investment has not created widespread productivity growth.
Table 1: Capital Productivity by Sector
Investment in Railways and Roads: Is it helping households?
Our challenge in this context is even more formidable, as the household expenditure (% of total personal consumption expenditure) on transport has gone up significantly over the years. Similarly, the household expenditure on communication too has been going up, though not as sharply as the transport expenditure.
In summary, our resource allocation strategy has neither delivered the required level of investment nor helped the households and businesses lower their cost of living or the cost of doing business. We, therefore, expect the budget the do the following:
• Stop investing in new vanity projects (bullet trains, metros in smaller towns, nuclear power, etc.) and be willing to abandon the current ones, if they are not expected to lower the cost of living or that of doing business.
• Abandon projects that have become unviable on account of cost and time overruns.
• Allocate resources to projects that help improve the quality of life for our households, e.g., sanitation, healthcare, nutrition, education, technical skills for everyday needs, etc. If we cannot provide our youth the opportunity to earn, the least we can do is to provide for a healthy life. An increase in capacity for delivering public services helps generate employment across skills levels too.
• Invest in urban infrastructure projects that help lower the transportation cost burden, save time, and reduce pollution that is killing people at an ever-faster rate. Urban infrastructure projects will have far more significant impact than any bullet train project.
• Allow and encourage eighth pay commission to assess the impact of upward structural shift in cost of living and enhance wages of government employees. Any increase in government sector wage encourages the private sector to pay a higher wage, which enhances our ability to invest in our future.
• Focus on capital productivity, as we cannot afford to waste capital at our stage of development. Our growth in labour productivity has been higher than that in capital productivity and, therefore, the chances of wage-led inflation are low.
In summary, we need a near-complete rethink on our resource mobilisation and allocation strategy. As for capital expenditure, less must become more. Our CapEx must help improve quality of life and reduce the cost of living. We need investments to improve household earnings and not increase their cost of living. Else, we run the risk of dis-inflation becoming deflation and we not being able to grow at a rate beyond 6-7%, which in itself is grossly inadequate.