What the Finance Minister’s budget speech tells us – and what it doesn’t

The FM said a lot about the economy, but the story is not as simplistic as it has been made out to be.

WrittenBy:Vivek Kaul
Nirmala Sitharaman presenting the interim budget today.

Finance Minister Nirmala Sitharaman presented her sixth budget today. It was an interim budget, with the full budget being due once the next government is elected after the Lok Sabha polls, which should happen in April and May.

A significant part of the budget speech was dedicated to promoting the idea of how all is better under the current government. Sitharaman offered a few data points to buttress her claims.

Sample this one: “People are living better and earning better, with even greater aspirations for the future. Average real income of the people has increased by fifty percent.”

The per capita gross domestic product (GDP) or per capita income in constant terms is a good representation for average real income. Data in constant terms is adjusted for inflation and hence, is real income.

The per capita income or the average real income in 2023-24 is expected to be Rs 1.23 lakh, a jump of 57 percent from 2013-14 when it was at Rs 78,348. In fact, the per capita income from 2003-04, when it was Rs 47,370, to 2013-14, when it was at Rs 78,348, went up by more than 65 percent, clearly higher than the jump from 2013-14 to 2023-24.

Nonetheless, the Covid pandemic happened in 2020 and 2021 and that has had an impact on per capita income growth from 2013-14 to 2023-24. But then the financial crisis that started in 2008 had an impact on per capita income growth from 2003-04 to 2013-14. Both the decades had their pivotal economic events, though the pandemic was clearly a bigger negative event than the financial crisis. 

This nuance was missing in the simplistic statement of the average real income going up by 50 percent.

Let’s consider another claim: “The foreign direct investment (FDI) inflow during 2014-23 was $596 billion marking a golden era. That is twice the inflow during 2005-14.” 

The total amount of FDI coming in from 2014-15 to 2022-23 was $596.46 billion, exactly like the finance minister claimed. The total amount of FDI that came in from 2005-06 to 2013-14 was at $298 billion. So, the flow from 2014-15 to 2022-23 was twice that of that in the earlier period, exactly like the minister claimed.

Now, it is worth noting here that the figures used by Sitharaman in her speech represent gross FDI into India. A proper comparison also needs to consider repatriation carried out by foreign companies bringing FDI into India. Once we do this, the picture changes.

The FDI coming into India from 2005-06 to 2013-14 was at $259.7 billion. And for 2014-15 to 2022-23, it stood at $414.3 billion or around 60 percent more than in the earlier period – not 100 percent.

Even these numbers do not take the increasing size of the Indian economy or its GDP into account. This is something that needs to be considered given that as the economy grows, the potential for higher FDI coming in, in absolute terms, also goes up, simply because the size of the market that is available to foreign businesses goes up.

What happens when we adjust these FDI numbers for the size of the economy? The ratio of total FDI to total GDP for 2005-06 to 2013-14 comes in at two percent of the GDP (considering World Bank GDP data in current US dollar terms).

The ratio of total FDI to total GDP for 2014-15 to 2022-23 comes in at 1.7 percent of the GDP. Again, the figure in the latter period would have been impacted by the Covid pandemic and the figure in the former period by the financial crisis that started in 2008. These nuances typically never seem to make it into political speeches and investment theses.

Let’s consider a few more claims made about the economy. 

As the very first statement of the speech said: “The Indian economy has witnessed profound positive transformation in the last 10 years. The people of India are looking ahead to the future with hope and optimism.” 

Or as it was pointed out a little later: “The economy is doing well.” Or: “The economy has been put firmly on a high sustainable growth path.”

Now, there is no denying that on the whole, the Indian economy seems to be doing well. In 2023-24, it is expected to grow by 7.3 percent in real terms adjusted for inflation. Nonetheless, private consumption expenditure, which forms close to 60 percent of the economy, is expected to grow by just 4.4 percent in 2023-24, the slowest in more than 20 years, except for the pandemic year of 2020-21 when it had contracted by 5.2 percent. If we leave out 2020-21, this is the slowest growth since 2002-03 when private consumption had grown 2.9 percent.

What does this tell us? It tells us that a large section of the population is still struggling with the after-effects of the pandemic, though a small section of the population is doing very well. And this is the segment which makes the most noise on social media.  

So, the claim about hope and optimism and a positive transformation rings hollow.

In fact, if we look at consumption growth from the end of 2018-19, the financial year before Covid broke out, to the end of 2023-24, it averages 4.5 percent per year. To give a sense of comparison, the private consumption growth in the period of five years from the end of 2013-14 to the end of 2018-19 had averaged 7.2 percent per year.

This is visible in a whole host of data: stagnant penetration of mobile phones in rural areas; work demanded under the Mahatma Gandhi National Rural Employment Guarantee Scheme; the continued slow-business growth of fast moving consumer goods companies in rural areas; high rural food inflation. Also the fact that in late November 2023, the government decided to extend the scheme providing free food grains to about 81.35 crore beneficiaries under the Pradhan Mantri Garib Kalyan Anna Yojana for a period of five years with effect from January 1, 2024.

So, the crisis really hasn’t been overcome and there is more than enough data to show just that. 

The point being the story is not as simplistic as it has been made out to be. The economy is a complex being, but politicians need to make crisp, clear and concise statements to get their message across the world at large. If the finance minister had gone into such details, she would have lost her audience in the process. And who does that?

Vivek Kaul is the author of Bad Money.

Update on Feb 2: A typo (‘nothing’ instead of ‘noting’) was corrected in the copy.

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