• UGI USER
  • Feb 05, 2024
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LAYING FOUNDATION FOR A DEVELOPED ECONOMY

Syllabus: 

  • GS 3 : Government Budgeting

Focus:

  • India’s economic strategy, characterized by fiscal prudence and capital expenditure-led growth, has garnered global acclaim for its effectiveness in navigating economic challenges while fostering inclusive development.
  • Emphasizing fiscal responsibility alongside strategic investments in infrastructure and human capital, India’s approach aims to create a conducive environment for sustainable economic growth.

Historical Growth Trajectory:

Mid-2000s:

  • Indian GDP surged at a remarkable 9% annually in the mid-2000s, fueled by robust global trade growth.
  • However, unsustainable factors like a financial sector bubble contributed to this growth.

Global Financial Crisis:

  • Growth decelerated to 6% post the 2007-08 global financial crisis as world trade slowed down abruptly.

2012-15:

  • GDP growth fell to around 4.5% by 2012-13, but subsequent years saw a jump due to a revision in GDP calculation methodology in 2015.
  • Despite the revision, real growth didn’t improve significantly.

2016-2018:

  • Growth faced headwinds from demonetization and GST rollout.
  • The collapse of the finance-real estate bubble post the IL&FS bankruptcy further dampened growth, reducing GDP to 3.9% in the year preceding the pandemic.

Pre-Covid Years:

  • Demand Weakness: Private corporate fixed investment plummeted from 17% of GDP in 2007-08 to 11% in 2019-20, indicating subdued demand.
  • Fearful of job prospects, domestic consumers curtailed spending, while foreign demand for Indian goods remained limited.

Covid Years:

  • Economic Volatility: 
  • Amid the pandemic, the economy witnessed sharp declines, modest recoveries, severe slowdowns, and sporadic rebounds from late 2022 onwards.

Budget Highlights

Source: India Technology News
  • Assessing the post-Covid phase requires evaluating the average growth rate over the entire period.
  • Demand Indicators:
  • Private corporate investment further decreased to 10% of GDP in 2021-22, indicating lingering demand weakness.
  • The annual growth rate averaged around 4.2% over the latest four quarters compared to just over 2% when comparing the latest quarter pre-Covid.

Welfare Paradigm Shift:

  • India’s welfare programs have undergone a significant transformation, shifting from targeted interventions to universal access to basic amenities and services.
  • By adopting a citizen-centric approach, India’s welfare initiatives prioritize the provision of essential services such as housing, electricity, healthcare, and education to all citizens, regardless of socio-economic status.

Budget Alignment with Expectations

  • Confederation of Indian Industries (CII) Expectations:
  • The CII’s expectations for the interim budget centered around fiscal discipline, investments in critical infrastructure, and measures to address socio-economic disparities.
  • Anticipating a proactive approach to bolster economic resilience and foster inclusive growth, the CII sought initiatives aimed at supporting vulnerable segments of society while promoting long-term economic sustainability.
  • Budgetary Outcomes:
  • The interim budget’s alignment with the CII’s expectations underscores the government’s commitment to prudent fiscal management and inclusive development.
  • With a focus on increasing capital expenditure and supporting key sectors, the budget reflects a comprehensive strategy to stimulate economic growth while addressing socio-economic challenges.

Capex Boost and Economic Resilience

  • Significance of Capital Expenditure (Capex):
  • Capital expenditure (capex) plays a pivotal role in driving economic growth by enhancing productive capacity, improving infrastructure, and fostering innovation.
  • By prioritizing investments in infrastructure, healthcare, education, and technology, India aims to strengthen its economic foundation and enhance long-term competitiveness.
  • Impact on Economic Resilience
  • The emphasis on capex in the interim budget is expected to have a multiplier effect on economic resilience by stimulating demand, creating employment opportunities, and enhancing productivity.
  • Through strategic investments in critical sectors, India seeks to build a robust economic framework capable of withstanding external shocks and fostering sustained growth.

Industry Support and Sustainability Focus

  • Industry Stimulus Measures:
  • The interim budget includes measures to support industries through access to credit, technology adoption, and regulatory reforms.
  • By facilitating an enabling environment for businesses to thrive, India aims to promote entrepreneurship, innovation, and competitiveness in the global market.
  • Sustainability Initiatives:
  • Recognizing the importance of environmental sustainability, the budget allocates resources to promote renewable energy, enhance eco-friendly practices, and address climate change.
  • Through investments in clean energy infrastructure, conservation initiatives, and green technologies, India demonstrates its commitment to building a sustainable future for generations to come.
Understanding the Budget

The Union Budget is India’s annual financial statement presented on February 1st by the Finance Minister in the Lok Sabha.

Budget Preparation:

The Department of Economic Affairs, Ministry of Finance, prepares the Budget document.

Budget Classification:

·    Revenue Budget: Covers expected income and expenses within a year, including taxes and regular sources of revenue.

·    Capital Budget: Manages government assets and liabilities, including major expenses like infrastructure development.

Budget Parts:

·    Part A: Announces government schemes, priorities, and sector allocations.

·    Part B: Contains the Finance Bill, including taxation proposals like income tax revisions and indirect taxes. The Finance Bill is considered a Money Bill under Article 110 of the Constitution, subject to the Speaker’s approval.

Constitutional Provisions Related to India’s Union Budget:

·    As per Article 112, the Union Budget is the government’s estimated receipts and expenditures, termed the Annual Financial Statement.

·    Key Budget documents include the Annual Financial Statement, Demands for Grants, Finance Bill, and Fiscal Policy Statements mandated by the Fiscal Responsibility and Budget Management Act (FRBM Act), 2003.

·    Additional explanatory documents presented include Expenditure & Receipt of Budget, Expenditure Profile, Budget at a Glance, and more.

Objectives of Union Budget:

·    Economic Growth: Stimulate rapid and balanced economic growth nationwide.

·    Social Justice and Equality: Promote social justice and equality, ensuring equitable distribution of benefits.

·    Resource Allocation: Allocate resources effectively to minimize unemployment and poverty.

·    Fiscal Stability: Maintain fiscal stability by controlling prices, reducing wealth and income disparities, and reforming the tax system.

India’s interim budget reflects a strategic vision aimed at laying the foundations for a developed economy characterized by fiscal stability, inclusive growth, and environmental sustainability. By prioritizing investments in critical sectors, supporting vulnerable populations, and promoting innovation, India reaffirms its commitment to building a resilient and prosperous nation.

 

Source:

https://www.google.com/amp/s/www.newindianexpress.com/amp/story/opinions/2024/Feb/02/laying-foundations-for-a-developed-economy

Mains Practice Question:

Discuss India’s economic trajectory from the mid-2000s to the post-Covid era, analyzing the factors influencing growth and the role of fiscal policies.