Inside India

The Union budget and India's growth story

In Europe and the U.S., a central government announcing a yearly budget tends to go fully unnoticed, save for a few snores in the media. Not so in India, where the Union budget, realeased on the first day of February, is followed with remarkable attention and trascends the pages of the financial press to become a regular piece of conversation in businesses and families. It is a beautiful demonstration of the country’s democratic life.


There were high expectations about this year’s budget’s ability to deliver a push to India’s growth (estimated at 7% for the upcoming year) while addressing the global headwinds of inflation and recession fears. In other words, people were expecting strong government investment and tax relief for a broad swath of people, while keeping the deficit under control. In all those aspects, the broad consensus is that the final budget delivered well.


For instance, the budget introduces a new income tax regime that reduces (or eliminates entirely) income taxes for a larger number of people. This will likely goose up consumption and help GDP growth. A relatively short-term action but a welcome one.


Then, the budget targets government’s capital expenditures of Rs 10 lakh crore ($122 billion), a 33% increase over the previous year and three times (!) the amount that was allocated only three years ago. This is a much bigger deal long term. In an emergent country that is furiously trying to cover its many infrastructure gaps, public spending plays an outsized role and the numbers announced, as well as the sectors in which the capital is going, are very interesting, particularly in three areas: Transportation, green energy and agriculture.

Roads and railways

Rs 5.17 trillion ($65 billion) will go to transportation infrastructure. This is almost 50% of the total budgeted capex and a 56% increase over the previous year. One can see this investment as a powerful long term boost to growth in both the domestic and the international fronts. First, the domestic front. Railways, roads and airports are critical in further connecting India’s Tier-2 and Tier-3 cities to the country’s growth engine. Cities like Jaipur, Indore, Surat, Kochi, Coimbatore, Chandigarh, to name just a few, or even smaller ones like Dehradun, Vijayawada, Warangal and Sonapat have grown at explosive rates in recent years, helped in no small measure by the digital infrastructure already in place (50% of online shoppers are in fact in these type of cities and 50% of the Indian startups are located there as well). Improving their physical links to the rest of the country will greatly increase the number of economic hubs contributing to the GDP, with a likely multiplier effect.


Second, the international front. One of the challenges of reallocating global manufacturing capacity to India -a hot topic these days- is the country’s poor connections to the rest of the world. Ports, railways and roads are therefore critical to linking the future manufacturing capacity to the global supply chain. The strong allocations to railways and roads in particular will further reduce the cost of logistics, which is still a few points above other comparable economies (13% of GDP in India vs average 11% in BRICS countries) and also improve India’s position in the global Logistics Performance Index by the World Bank (44th at the moment).

Green energy and agritech

On clean energy the budget continues the pursuit of energy transition goals by allocating Rs 35,000 crore (about $4 billion) to projects for energy storage (a key element for the adoption of renewable energy sources). Even though this amount is only about 13% of the total annual investment required for India to reach its net zero goals by 2070, it should make the project economics (say, for a pumped hydro storage facility with high upfront development costs) more attractive to private players. The budget also extends EV subsidies, making its modest contribution to these initial stages of the EV market development in India, which is on its own a really fascinating case study that deserves more attention.


But perhaps the most non-traditional approach in the whole budget is the one targeting the agricultural sector. The traditional farming subsidies are still there but almost at the same level as the previous year. Instead, the stress is put on leveraging digital technology. First, the government will create a digital platform for farmers, to facilitate and democratise access to farm inputs and to services like planning, market intelligence, credit, insurance, and others. That is a familiar playbook in India these days, one in which the government provides a key piece of digital infrastructure (UPI, Digilocker, ONCD, Co-Win, etc) as a public good, hoping that large and small players populate it with innovative offerings at affordable costs. Such playbook is not a guarantee of success in every sector and domain, of course, but it is hard to argue with the government’s strike rate so far.


This new digital platform will be particularly suited for the growing number of agritech startups, which also get a boost in the budget with the creation of a focused accelerator fund. This accelerator proposal is sparse on details, including the fund size but it is meant to replicate other government venture capital initiatives like SIDBI or SRI and act also as a fund of funds, thus giving a push to private investment in the agritech sector.

A final thought

There is an inherent danger in such a strong investment effort by the central government. And that danger is the reinforcement of the narrative that the government, and not the private sector, is the driver of the Indian growth story. This would be a mistake because there are simply too many targets and not enough money at the central and state level to address all of them. Moreover, slow bureaucratic processes often make it difficult to turn whatever public allocation the government makes into actual projects.


Therefore the goal of all this public capex has to be to create strong conditions for private investment to follow. Some signs of that happening might be there, with the recent announcements of Tata and Vedanta’s plans for semi-conductors and electronics manufacturing or Reliance and Aditya Birla’s investments in the green energy sector. And then a lot of work on simplifying tender processes and creating stronger frameworks for public-private projects (PPP) is also required. And last but not least, the government needs to keep opening up sectors and attracting foreign capital to do its (smaller) part as well.


Despite these challenges, one could definitely say that, all things considered, the Union budget was a pretty good day at the office for the Indian economy.