Union Budget 2022: From Consumption to investment, challenges galore for FM Sitharaman

As Finance Minister Nirmala Sitharaman presents her fourth budget on February 1, the spectre of coronavirus and its devious variants will cast a gloomy spell over the Annual Financial Statement, which chart the Indian economy's course in the upcoming year.

Emboldened by the first advance estimate of the gross domestic product released by the Ministry of Statistics and Programme Implementation (MOSPI) for the financial year 2021-22 at 9.2 per cent or the RBI projection of 9.5 per cent, some may argue that the economy is better off this year with promising growth. The GDP at Constant (2011-12) Prices in Q2 2021-22 is estimated at Rs 35.73 lakh crore marginally higher than the corresponding figure in FY20.

Beneath the optimistic outline, however, is a depressing base value of Rs 145.69 lakh crore, the real GDP in 2019-20 after 7.3 per cent contraction. But on a positive note, the economy has reached the pre-pandemic level and sectors like agriculture, mining and manufacturing, earlier mired in deep red, are beginning to look rosy.

Balancing Act

The GDP or the gross domestic product, which is often quoted as an indicator of the state of the economy, consists of four key factors -- consumption, investment, government expenditure and net exports.

(GDP = private consumption + gross private investment + government investment + government spending + exports – imports.)

The performance of these factors and timely allocations through fiscal and monetary policy will contribute to a great extent towards addressing the core issues faced by the economy. With inflationary pressures just under the RBI target, the scope of a revival through monetary policy is limited.

Private Consumption

The private final consumption expenditure (PFCE), which captures the consumer demand of the economy, accounts for more than half of the GDP.

It accounted for 54.5 per cent of the GDP in the second quarter. Needless to say boosting consumer demand should be an inevitable part of the government strategy to revive the Indian economy.

While the PFCE rose in comparison to the first quarter in FY21, it remained 3.5 per cent lower than the corresponding figure in FY20.

The already falling consumption levels in pre-Covid times took a severe hit with the lockdown. The dip in incomes spurred by the lockdown and the looming uncertainty cast by the pandemic could perhaps be the key factors preventing households from spending.

The Centre should, therefore, aim at boosting household expenditure by ramping up government expenditure and usher in the process of 'crowding-in' private investment.

(Crowding in occurs when higher government spending leads to an increase in private sector investment.)

While tax cuts and home loan benefits are likely to give middle-income households more purchasing power, cash transfers are likely to motivate poorer households to spend. The good health of the unorganized and MSME sectors, which employ a larger section of the population, is also essential for reviving consumer sentiment.

Government Spending 

Increased government spending will create a ripple effect (or the multiplier effect) by placing more money in the hands of the reluctant consumer and investor, encouraging them to spend.

Investment on the part of the government is expected to motivate private investors to follow the lead. However, it is unlikely to create a spurt in private investment if it is not backed by a strong recovery of consumer demand.

Government Final Consumption Expenditure (GFCE) constituted 10.1 per cent of the GDP in the second quarter - Rs 3.61 lakh crore. This is, however, lower than the corresponding figure of 13 per cent last year.

Investment 

Gross fixed capital formation or private investment comprises more than 30 per cent of India's GDP (32% in Q2).

Among the gloomy stats, the GFCF alone was a silver lining recording an increase in the second quarter compared to Q1 (11% rise) and the corresponding figure last year (1.5% rise). With a sum of Rs 11,42,907 crore, GFCF proved to be the main factor that drove growth last quarter.

The central government hoped to achieve a high multiplier effect on GFCF through increased capital expenditure last year. It is likely to continue the strategy this budget.

Net Exports 

India hit a monthly high in exports in December and the three quarters together registered a rise of 25 per cent compared to the same period in FY20. However, experts are expecting the third Covid wave and rising commodity prices to adversely affect the import-export ratio, thereby widening the trade deficit. And a trade deficit will inevitably carve into the small gains made by the GDP.

In short, the success of the budget will lie in identifying the key drivers of the Indian economy like consumption, and understanding the underlying dynamics between the four major drivers of the economy. 

India will need to break free from the staggered K-shaped recovery, which is aiding only certain industries and initiate a more equitable growth through focussed spending.