Economics for Everyone - Budget 2022 view – Managing through Multiplier Effect

Indian Finance minister Mrs.Nirmala Sitharaman has said the budget stresses on areas with high multiplier effects such as infrastructure that would facilitate the private investments with thrust being on transparency and tax stability.

February 05, 2022 12:57 IST | India Infoline News Service
“Hon'ble Speaker sir, Budget 2021-22 had provided a sharp increase in provision for public investment or capital expenditure. Throughout the
year, with the Hon'ble Prime Minister, guiding the implementation, our economic recovery is continuing to benefit from the multiplier effect. Capital investment holds the key to speedy and sustained economic revival and consolidation through its multiplier effect.” Nirmala Sitharaman, MINISTER OF FINANCE in her Budget speech February 1, 2022

Indian Finance minister Mrs.Nirmala Sitharaman has said the budget stresses on areas with high multiplier effects such as infrastructure that would facilitate the private investments with thrust being on transparency and tax stability.

The Union Budget 2022 seems to strike a balance as it strives to fill the huge gap created by the COVID-19 pandemic through focused and growth-oriented approaches. The booster dose for investment allocation Infrastructure will speed up the pace of economic recovery but also pave a for better growth.

The main challenges are in the areas are slowdown and employment creation in many sectors both of them are interlinked a classical economics challenge. The key link is to push demand which pushes growth. This leads to investment and hence job creation.

Let us see some of the broad macroeconomic pictures of the Budget.

Expenditure: The government proposes to spend Rs 39,44,909 crore in 2022-23, which is an increase of 4.6% over the revised estimate of 2021-22. In 2021-22, total expenditure is estimated to be 8.2% higher than the budget estimate.
  • Receipts: The receipts (other than borrowings) in 2022-23 are expected to be to Rs 22,83,713 crore, an increase of 4.8% over the revised estimate of 2021-22. In 2021-22, total receipts (other than borrowings) are estimated to be 10.2% higher than the budget estimates.
  • GDP: The government has estimated a nominal GDP growth rate of 11.1% in 2022-23 (i.e., real growth plus inflation).
  • Deficits: Revenue deficit in 2022-23 is targeted at 3.8% of GDP, which is lower than the revised estimate of 4.7% in 2021-22. Fiscal deficit in 2022-23 is targeted at 6.4% of GDP, lower than the revised estimate of 6.9% of GDP in 2021-22 (marginally higher than the budget estimate of 6.8% of GDP). Interest expenditure at Rs 9,40,651 crore is estimated to be 43% of revenue receipts.
In this context, it is important to understand the concept of the Multiplier effect,

The multiplier effect refers to the proportional amount of increase, or decrease, in final income that results from an injection, or withdrawal, of spending. The multiplier effect refers to the increase in final income arising from any new injection of spending in the economy. Generally, economists are usually the most interested in how capital infusions positively affect income. Most economists believe that capital infusions of any kind—whether it be at the governmental or corporate level—will have a broad snowball effect on various aspects of economic activity. As its name suggests, the multiplier effect provides a numerical value or estimate of a magnified expected increase in income per investment. In general, the multiplier used in gauging the multiplier effect is calculated as follows: Investment leads to Income leads to spending.

The size of the multiplier depends upon the household's marginal decisions to spend, called the marginal propensity to consume (MPC), or to save, and called the marginal propensity to save (MPS). It is important to remember that when income is spent, this spending becomes someone else’s income, and so on. The Keynesian Multiplier is an economic theory that asserts that an increase in private consumption expenditure, investment expenditure, or net government spending (gross government spending – government tax revenue) raises the total Gross Domestic Product (GDP) by more than the amount of the increase. Economist John Maynard Keynes published a text that would change the course of economic thought. Titled “The General Theory of Employment, Interest, and Money,” or simply as “The General Theory,” it is considered one of the classical works in economics. The book attempted to explain short-term economic fluctuations in general, especially the fluctuations observed during the Great Depression in the early 1930s. The main idea put forth by Keynes in The General Theory was that recessions and depressions could occur because of inadequate demand in the market for goods and services. The General Theory had a profound impact not only among economists but also among policymakers across the world. In response to widespread unemployment and low levels of economic activity across the world, Keynes called for an increase in government spending to boost demand for goods and services in the market. The thinking went against the existing classical economic policy of laissez-faire and minimal government interference.

The circumstance before the presentation on this budget was a slowing economy, a fall in aggregate demand and credit flow, and global uncertainty. The challenge before the finance minister was how to deliver a demand stimulus and growth boost. The multiple objectives outlined in the Budget seek to solve these challenges and achieve growth.

The Budget 2022 Measures:

The Budget lays the following four priorities:
  • PM GatiShakti
  • Inclusive Development
  • Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action
  • Financing of Investments
Some of the other key measures include


In her Budget presentation, Union Minister Nirmala Sitharaman announced a sharp jump of 35.4 percent in capital expenditure (Capex) to fund various infrastructure projects in 2022-23. The government will invest Rs 7.50 lakh crore as capital expenditure next year, a sharp jump from Rs 5.54 lakh crore in the current year. This investment through multiplier effect in the next financial year to kickstart a “virtuous cycle of investment” and crowd in private investment.

PM Gati Shakti is a transformative approach for economic growth and sustainable development. The approach is driven by seven engines, namely, Roads, Railways, Airports, Ports, Mass Transport, Waterways, and Logistics Infrastructure. All seven engines will pull forward the economy in unison. These engines are supported by the complementary roles of Energy Transmission, IT Communication, Bulk Water & Sewerage, and Social Infrastructure. Finally, the approach is powered by Clean Energy and Sabka Prayas – the efforts of the Central Government, the state governments, and the private sector together – leading to huge job and entrepreneurial opportunities for all, especially the youth.

In five big infrastructure projects, the government has proposed expanding highways in the country by 25,000 kilometers, allocating Rs 60,000 crore to the Nal se Jal scheme, five river link projects across various states, an additional Rs 48,000 crore in the PM housing scheme, and boosting infrastructure development in the North East. Scheme to boost infrastructure in the villages along India’s border with China (also will strengthen the Security).New scheme in public-private partnership (PPP) mode for delivery of digital and hi-tech services to farmers and a new fund with blended capital to finance startups for agriculture and rural enterprise in the Union Budget 2022-23.

Digital Rupee: The government is launching the Digital Rupee — a central bank digital currency (CBDC). The Reserve Bank of India will launch the CBDC in the upcoming financial year. This follows the government's plans to launch the CBDC that will be backed by blockchain technology. Proposed setting up 75 digital banking units in 75 districts.

Digital India: Formation of a digital university to provide access to world-class education to Indian students. The budget this year also focused on digital learning citing the prolonged closure of schools impacting students’ academic performance. The minister also announced that the digital university will impart lessons in all regional languages creating a network of ‘hub and spoke’. The university will work with the other central universities in the country to provide the required digital infrastructure and training. Dwelling on the subject of Skill development and Quality Education, The Budget allocated additional Rs 51,971 crs to settle Air India's debt. Finance Minister said that Startups will be promoted to facilitate ‘Drone Shakti’ through varied applications and for Drone-As-A-Service (DrAAS).

The finance minister announced a budget of Rs 40,828.35 for the higher education sector, showing an increase of Rs 2,478.35 crore, or 6.46%, over the 2021-22 budget estimate.

Make in India: Budget maintained the government’s focus on boosting India's manufacturing strengths. While the Production Linked Incentives (PLI) schemes across 13 sectors were introduced last year with an outlay of Rs 2 lakh crore, this Budget received two additional PLIs, with the intent to promote solar and new-age manufacturing processes involving 5G technology. The Emergency Credit Line Guarantee Scheme (ECLGS) will be extended to cover the next fiscal as well, with an expanded guarantee cover of Rs 5 lakh crore to help medium, small firms.

Towards Green Economy: To adopt green energy, the government has taken initiatives in investing in solar energy, which will help in achieving the ambitious goal of 280 GW of solar capacity by 2030. In addition, the government will issue sovereign green bonds for funding green infrastructure. These projects will have a positive impact on the environment or climate effects and will help to reduce the carbon intensity of the economy.

Push for organic, zero-budget natural farming. States will be encouraged to revise syllabi of agricultural universities to meet the needs of natural, zero-budget, and organic farming, modern-day agriculture, value addition, and management.

From green bonds, electric vehicles, increasing solar capacity to organic farming, the budget has moved towards the goal of a green economy and sustainability

Fiscal Management: The Centre has reduced its subsidy budget for food, fertilizer, and fuel in the upcoming fiscal by 26.6 percent, compared to the Revised Estimates for this fiscal. Experts have noted that the move signals a normalisation of subsidy levels after two fiscals, which saw subsidy bills soar as the government sought to dampen the impact of the pandemic by offering a free food program and bore the brunt of higher international fertilizer prices.

The Ministry of Home Affairs (MHA) has been allocated  Rs 1.85 lakh crore in the Union budget for 2022-23, which is over 11% higher than the allocation of Rs 1.66 lakh crore in the last

Tax: Tax returns can now be revised for omission and mistakes including declared income not reported. The changes can be made through a one-time window till two years from the end of the assessment year on payment of tax. Brought virtual currencies like cryptocurrency and non-fungible tokens under the tax net. Cryptoassets to be taxed at 30% of transfer gains. Irrespective of short or long term. No deduction for expenses. The highest rate of taxation for capital gains on any financial asset. 1% tax collection at source as well.IT Returns can now be revised for omission, mistakes. Surcharge on the transfer of any long-term capital gains has been capped at 15 percent. Proposed to cap the surcharge on long-term capital gains (LTCG) from shares of unlisted companies at 15 percent in the Union Budget 2022-23 which is likely to boost Startup investment.

The Minimum Alternate Tax rate for cooperatives at 18.5 percent has been reduced to bring it with parity of the rate for corporates. Also, the surcharge for cooperatives has been reduced to 7 percent from 12 percent for total income ranging between Rs 1-10 crore. The Budget has also extended the timelines for benefits under the new corporate tax regime. The government had announced a 15 percent corporate tax rate for newly incorporated manufacturing companies till March 31, 2023, which has now been extended till March 31, 2024. The period of incorporation for startups to avail tax benefits has also been extended by a year to March 31, 2023

In a move that will ease exits from startups and Unicorns, the Finance Minister announced a reduction of surcharge on unlisted shares from 28.5 percent to 23 percent. The Union Budget 2022 does not have any specific measurements for the FMCG sector. However, an increase in government expenditure in the areas of infrastructure, mobility, and connectivity will help boost rural incomes. There are no changes in the personal income tax this year. increase the tax deduction limit from 10 percent to 14 percent on employer’s contribution to the NPS account of State Government employees as well. The introduction of the tax on virtual digital assets is expected to shape a new taxation regime around cryptocurrencies and similar investments.

The government has already made an initiative to push more credit to the economy through the credit policy of RBI. Also, there has been increasing public investment to push the economy since the last few years. But all these policies have an inflationary and fiscal impact. The key issue is demand management. This can be pushed only through consumption. Consumption, the mainstay of the Indian economy, has considerably slowed down in recent times. Traditional policy belief dictates, that the government take initiatives to keep more money (more purchasing power) in the hands of consumers and investors through credit policy (reducing the interest rate) and less tax (tax exemption).

Overall, Budget 2022 may be regarded as being consistent with a directional alignment to last year's budget focus on building trust. It focuses on long-term growth and envisions building a strong and bold economy with an emphasis on domestic manufacturing, digitisation, rural upliftment, and planned urbanization. It also highlights fiscal deficit consolidation in the near future, based on continued strong economic recovery despite the ongoing pandemic. Overall policy framework emphasizes addressing both supply and demand-side constraints and adopting an agile policy response to the unprecedented challenges posed by the ongoing pandemic for sustainable development and job creation. In this process, the government also aims at propelling the growth to achieve the dream of a 5 trillion dollar economy.

The author of this article is Prof.M.Guruprasad, UNIVERSAL BUSINESS SCHOOL

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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