Modern economics for free markets is well known to discourage government intervention in the economy and let the free forces of demand and supply shape economic transactions. This idea has been used time and again by different stakeholders and has become the defining trait of free-market economics. 

While the world hasn’t seen a completely unrestricted market as yet, all major economies have been known to follow some variant of laissez-faire. Against this backdrop, a recent article by TIME discussed the newfound confidence that businesses in the United States have shown in public investment post the onset of the pandemic. The article hints at the gradual end of the free market system around the world as we know it, and while it may be too soon to conclude that, the point remains that the crisis has shown public investment to play a key role in economies, particularly in rebuilding post-crisis. 

The budget of 2022 has again put emphasis on public investment with the hon’ble finance minister highlighting the immediate need for capital expenditure from the government to not just crowd in private investments but also create livelihood opportunities. This is over and above the long-term effect that investment in capital will have on the economy in terms of increased FDI.

The outlay for capital expenditure in the Union Budget is once again being stepped up sharply by 35.4 per cent from Rs. 5.54 lakh crore in the current year to Rs. 7.50 lakh crore in 2022-23. This has increased to more than 2.2 times the expenditure of 2019-20. This outlay in 2022-23 will be 2.9 per cent of GDP. 

This investment taken together with the provision made for the creation of capital assets through Grants-in-Aid to states, the effective capital expenditure of the Central Government is estimated at Rs. 10.68 lakh crore in 2022-23, which will be about 4.1 per cent of GDP. It is important to highlight here that Indian public investment was already high, highlighted by its second position in the BRICS nations gross capital formation to GDP ratio. 

As per IMF, increasing public investment by 1 per cent of GDP could strengthen confidence in the recovery and boost GDP by 2.7 per cent, private investment by 10 per cent, and employment by 1.2 per cent if investments are of high quality and if existing public and private debt burdens do not weaken the response of the private sector to the stimulus.  In the current Indian context, the debt burden on the private sector owing to the pandemic has been cushioned by government schemes like the ECLGS  and the public debt should ideally not be a cause of concern with the government highlighting plans for innovative ways of financing investment and strategic PPP models.

In addition to this, empirical data from research published by IMF in 2015 shows that post the 1980s, public investment in India has in fact resulted in crowding in investments from the private sector in the short run. Looking at it from a more subjective angle, public investments increase private confidence in the economy and also reaffirm their faith in the government’s commitment to sustainable growth.  

In this light, the focus of the 2022 budget on public investment and infrastructure development is, in fact, a strategic move towards not just pandemic recovery but also sustainable growth, particularly during the Amrit Kaal.

The article has been authored by Karishma Sharma.

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