India’s economy is on the path of recovery after the pandemic-induced slowdown. The country’s gross domestic product (GDP) grew by 8.7% in 2021-22, according to the first official estimate released by the Statistics Ministry. However, the growth is projected to slip to 7% in the current fiscal year ending March 2023, owing to weak demand and supply-side constraints.
But there is hope for a brighter future. According to the Economic Survey 2021-22, India can achieve an average growth rate of more than 7% in the next decade, supported by various factors such as reforms, infrastructure, manufacturing, consumption and credit. Moreover, the Union Budget 2021-22 has announced several measures that can boost the growth potential of the economy and enhance its outlook.
Tax reforms and consumption boost
The Union Budget has proposed a new income tax regime that offers lower tax rates for those who opt for it and forego certain exemptions and deductions. The new regime will increase the disposable income of taxpayers and encourage them to spend more on consumption, which accounts for about 60% of India’s GDP.
According to the Reserve Bank of India (RBI), the saving on taxes will boost spending by households on consumption by 15 basis points (bps) in 2022-23. The central bank also expects a recovery of pent-up demand and an increase in discretionary consumption after the rollout of vaccines.
Additionally, the Budget has extended various tax benefits for affordable housing, startups, infrastructure and health sectors, which can stimulate investment and employment in these areas.
Infrastructure and manufacturing push
The Union Budget has increased the capital expenditure outlay for the third year in a row by 33% to Rs 10 trillion or 3.3% of GDP. This is expected to create a multiplier effect on the economy by generating demand, creating jobs and improving productivity.
The Budget has also announced a National Infrastructure Pipeline (NIP) that aims to invest Rs 111 lakh crore in various infrastructure projects over the next five years. The NIP will be financed by both public and private sources, including a new Development Finance Institution (DFI) that will provide long-term funding for infrastructure projects.
Another key initiative of the Budget is the Production-Linked Incentive (PLI) scheme that offers incentives to domestic and foreign manufacturers to set up or expand their production units in India. The scheme covers 13 sectors, including electronics, automobiles, pharmaceuticals and textiles, and aims to boost India’s manufacturing competitiveness and exports.
According to the Economic Survey, the PLI scheme can increase India’s manufacturing value added by $520 billion over the next five years and create 8 million jobs.
Digital transformation and green growth
The Union Budget has also focused on promoting digital transformation and green growth as key drivers of India’s future development. The Budget has allocated Rs 1.5 lakh crore for various digital initiatives such as broadband connectivity, digital payments, e-governance, fintech and startups.
The Economic Survey estimates that digital transformation can improve productivity by 10 bps per year and nurture the demographic dividend by 5-15 bps per year. Moreover, digital transformation can also enable greater financial inclusion, innovation and transparency in the economy.
The Budget has also announced several measures to support green growth such as increasing the renewable energy target to 450 gigawatts by 2030, launching a hydrogen energy mission, providing tax incentives for electric vehicles and scrapping old polluting vehicles.
The Economic Survey projects that green growth can add 100 bps to India’s potential output by 2030 and reduce carbon emissions by 35%.
Fiscal consolidation and macroeconomic stability
The Union Budget has also laid out a fiscal consolidation roadmap that aims to bring down the fiscal deficit from 9.5% of GDP in 2020-21 to 4.5% of GDP by 2025-26. The fiscal consolidation will be achieved by increasing revenue collection through improved tax compliance and divestment of public sector enterprises.
The fiscal consolidation will also help in reducing India’s public debt, which is expected to peak at 90% of GDP in 2020-21 and decline to 54.3% of GDP by 2027-28. The lower debt burden will ease the pressure on interest rates and inflation and create more fiscal space for productive spending.
According to the RBI, fiscal consolidation can lead to an average reduction in inflation of 26 bps per annum over the next five years and add 10 bps to potential growth.
