Across the Aisle by P Chidambaram: Magic (black) with numbers

There was a time when Mr Narendra Modi — and on cue his Finance Minister — swore by the private sector. Like Agriculture and most of the Services, in industry too, Mr Modi’s preferred model was private sector-led growth. The State will step back and be content to be the regulator where regulation was necessary.At some point of time, after demonetisation, Mr Modi appears to have changed his philosophy. As his faith in the private sector waned, he became a votary of the government-led model. With Budget 2022-23, the change is complete. This is a Budget driven by one engine: government capital expenditure. The rub, however, lies in the numbers.

Shifting Gears
The Finance Minister claimed that in 2021-22 the government had exceeded budgeted capital expenditure. As against a BE of Rs 5,54,236 crore, the RE number was Rs 6,02,711 crore. The surprise turned out to be unpleasant after one read the fine print. The latter amount included a sum of Rs 51,971 crore that was infused into Air India to repay past loans and liabilities before privatization! I did not know that repaying a loan would qualify as capital expenditure! Deducting this amount, the capital expenditure in 2021-22 was only Rs 5,50,840 crore — lower than the BE!That is not surprising. The government’s capacity to spend money on the capital account is constrained by many factors: multiple levels of decision-making, huge paperwork, diffused accountability, and so on. These constraints will not go away because Mr Modi shifted gears.There are more unpleasant surprises in the numbers. The Finance Minister generously announced that she will allow the states to borrow an additional sum of Rs 1,00,000 crore, interest free, if it was tied to capital expenditure. Soon it became clear that the states would borrow directly from the market and the Central government would bear only the interest. The nasty surprise was that the Finance Minister quietly tucked this sum into the 2022-23 BE of the Central government’s capital expenditure that printed at Rs 7,50,246 crore, and claimed that the Central government had enhanced its capital expenditure by 35 per cent over the previous year! By no stretch of argument would the additional borrowing by the state governments for their capital expenditure qualify to be Central government capital expenditure. This was deception of the worst kind. Deducting this amount, the Central government’s capital expenditure in 2022-23 BE would be only Rs 6,50,246 crore — a modest increase of Rs 1,00,000 crore over the true number of 2021-22 RE.

Losing Faith
The Modi government’s rhetoric of government capital expenditure-led growth is hyperbole. Further, the government does not have faith in the appetite of the private sector to invest more. The latter was exposed when the ambitious scheme to privatize public sector assets collapsed. Two years ago, the government decided to privatize BPCL, CCL and SCI. Last year, the government decided to privatize two public sector banks and one public sector insurance company. Also, last year, the Finance Minister announced a Grand Bargain Sale of monetizing public sector assets valued at Rs 6,00,000 crore. Not one of the proposals has seen the light of the day! The Railways invited bids to privatize 151 passenger trains on 109 routes — and got no bids! It was no surprise that against a disinvestment revenue target of Rs 1,75,000 crore in 2021-22 BE, the government hopes to achieve Rs 78,000 crore — that is if the LIC IPO goes through before March 2022!There are good reasons why the private sector is shying away from investment. The foremost reason is lack of demand. The capacity utilisation in many industries is around 50 per cent. Why would any one invest more when there is idle capacity? Besides, the business environment has become more difficult, not easier, and is filled with cronyism, suspicion and fear.

Ignoring Advice
Many economists have advised the following approach to pull the economy out of the current state of jobless and sluggish growth:

• Stimulate demand by putting more money in the hands of the poor and the middle class — transfer cash, cut indirect taxes:
• Revive the MSMEs that have shut down or have scaled down their business. Such revival will also bring back millions of jobs that were lost;
• Spend more on welfare. The excuse that “we don’t have enough money” will not wash because the top 10 per cent of the population has garnered 57 per cent of the national income and holds 77 per cent of the nation’s wealth. They must come forward and say, like the American billionaires, “tax us more”;
• Review the licence raj that has found its way back through multiple regulations and directions by the RBI, SEBI, the Income-Tax department, etc;
• Rein in the CBI, ED, SFIO and IT so far as businesses and banks are concerned.

I have no expectations that the government will listen to well-meaning advice. Leaving that aside, will the Finance Minister solve a puzzle that is troubling many economists. In 2022-23, will the nominal GDP grow by 11.1 per cent (as projected in the Budget papers) and the real GDP grow by 8 per cent (as predicted by the new CEO)? That would be heaven with inflation at only about 3 per cent!