Public Investment led GDP Growth

News: The Union Budget starts with an announcement that India’s domestic output (GDP) is likely to grow 9.2% this year (2021-22) over last year — the highest among the world’s large economies.


  • This year’s Budget seeks to boost public investment by 35.4% at current prices over last year to raise its share in GDP to 2.9% from 2.2% last year.
  • Investment-led growth: The Budget hopes to trigger a virtuous investment-led output and employment growth by arguing in favour of the “crowding-in” effect of public investment on private investment.
  • Challenge of mobilising resources: The crux will be to mobilise resources to finance the investment as the Budget seeks to reduce the fiscal deficit ratio, as per the schedule laid out in the last Budget.
  • With the threat of higher (imported) inflation (on account of rising international oil prices) and rising interest rates (on account of the US Federal Reserve’s decision), meeting the ambitious investment target would be challenging, but it is worth attempting.


  • How the budget will address the sharp decline of three percentage points of GDP in private consumption, which is likely to be caused by loss of employment? The derived demand for labour from an infrastructure boost may be limited, as the suggested projects are machinery intensive, not labour intensive.
  • The employment crisis would call for enhanced allocation for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) and initiating a similar scheme for meeting urban unemployment.

Manufacturing sector

  • The manufacturing sector’s share in GDP has been stagnating at around 15% of GDP for quite a while.
  • Lack of demand is the real problem, with low capacity utilisation. Indeed, the proposed public investment would create demand for capital and intermediate goods. But if a substantial share of such investment “leaks” out as imports, then the industrial output may not get the desired boost.
  • Growing import dependence: India has become an import-dependent economy, especially on China.
  • Despite the clarion call for Atmanirbhar Bharat, India’s trade deficit with China has gone up from $57.4 billion in 2018 to $64.5 billion in 2021.
  • And the deficit would be even higher if exports from China and Hong Kong to India are combined.
  • Improved EDB ranking and its limits: India launched the “Make in India” initiative in 2014-15 to raise the manufacturing sector’s share in GDP to 25% and create 100 million new jobs in the industry by 2022.
  • However, the Government diagnosed the principal barrier to increasing manufacturing in India as excessive and dysfunctional regulation holding back the private initiative.
  • The solution, it was argued, was to improve India’s rank in the World Bank’s Ease of Doing Business (EDB) index. India did splendidly to improve its rank — from 142 in 2014 to 63 by 2019-20.
  • But the improved ranking failed the industrial sector miserably, with a steady slowdown, noted above.
  • Last year, the World Bank scrapped the index as it was flawed globally and reportedly politically motivated.

PLI Scheme

  • India launched a production linked incentive scheme (PLI) for numerous technology-intensive products, starting with mobile phone assembly a few years ago to augment production and reduce imports.
  • The Budget has mentioned the overwhelming response to the scheme.
  • However, evidence on the number of such projects that have taken off, their investment and employment generation and rise in domestic content in such industrial units is too sparse.