Introduction

Kedarnath prides itself as being the heart of India’s spiritual culture. Located in the state of Uttarakhand at an altitude of 11,755 feet in the Garhwal Himalaya mountain ranges, the Kedarnath temple lies at the confluence of the Mandakini and Saraswati Rivers.^[1] This temple is the highest of the twelve Jyotirlingams in India. The first reference related to the Kedarnath temple finds mention in the Skandapurana^[2] and thereafter in various other ancient texts.^[3] There exist several theories regarding the origin of the temple. According to local folklores, the temple was built by the Pandavas. Yet another version mentions that Raja Bhoja of Malwa built the same in the 2^nd century. It is however popularly accepted that the present Kedarnath temple was built by the great Advaitic seer Adi Shankaracharya. The divine architectural wonder of the temple has stood the test of time and still remains as the cultural nerve centre of Bharatavarsha. Geologists claim that the Kedarnath temple was under snow for nearly 400 years during the little ice age, sometime between 1300-1900 CE.^[4] However, nothing has affected its glory and charm.

The largest natural disaster to hit India since the 2004 tsunami occurred in June 2013, when a midday cloudburst with a focus on the northern state of Uttarakhand triggered devastating floods and landslides. The amount of rain recorded in June 2013 was 385mm, which is far greater than what the state typically experiences. Major overflows were caused by debris blocking the rivers.^[5] Although all thirteen of the State’s districts were devastated, Bageshwar, Chamoli, Pithoragarh, Rudraprayag, and Uttarkashi were the worst afflicted. The catastrophe occurred during the busiest travel and pilgrimage period,^[6] greatly increasing the number of fatalities and increasing the magnitude of destruction. In the Mandakini valley, the effects of the disaster were most noticeable. Flooding occurred at the Kedarnath Shrine and the adjoining areas of Rambara, Agastyamuni, Tilwara, and Guptkashi due to torrential rainfall and the collapse of the Chorabari lake. Significant damage was also done to nearby pilgrimage sites like Gangotri, Yamunotri, and Badrinath. The catastrophe resulted in a significant loss of human and animal life.  It severely damaged both private and public assets. The flash floods affected over nine million people and countless animals.^[7] Over 4000 people died in the tragedy, which was attributed to nature and was written off as an “Act of God,” although it is clear that human meddling was also a prime reason for the catastrophe. The present article aims to identify the environmental factors and human trigger points that led to the calamity. It also aims to review Modi government’s Nature centric re-installation efforts for the restoration of the glory of Kedarnath Dham. Finally, the article aims to highlight that the seed of eco-conscious development lie in the rich philosophy of Bharatavarsha.                                                

Research Methodology

The study was conducted as a qualitative library method. The same is primarily based on secondary data taken from a variety of literary sources, most notably reports from the National Institute of Disaster Management (NIDM) and the Government of Uttarakhand, as well as numerous books, research papers, and articles. For this study, reports submitted by news agencies like Asian News International (ANI) have been meticulously followed. Official websites of Ministry of Tourism, Ministry of Environment, Planning Commission of India, Archeological Survey of India and Uttarakhand Tourism Development Board, have also been consulted. Additionally, locals were questioned to learn about their perspectives. Documentaries on Kedarnath and Uttarakhand have also been consulted to arrive at a conclusion. 

The Natural Causes of 2013 Kedarnath Tragedy

Kedarnath’s natural setting and environmental sensitivity most definitely had a role to play in the 2013 tragedy. Let’s briefly understand the natural causes that led to the disaster. 

1. Geographical setting: The positioning of Kedarnath makes it extremely vulnerable to natural calamities. The Delhi-Haridwar ridge further adds fuel to fire and makes Uttarakhand in general and Kedarnath in particular a geographically sensitive region. The Delhi-Haridwar ridge beyond the boundaries of Delhi submerges bellow alluvium and penetrates below the Himalayan rock. This ridge also lies on the Indo-Australian plate^[8] which is slowly shifting towards the North and is putting extreme pressure on Uttarakhand in the Himalayan range.
2. Rain prone area: The entire Kedarnatha region is prone to excessive rainfall. According to the Indian Meteorological Department, the phenomenal rainfall between June 14 and 18 resulted in devastating landslides. The rainfall between 15 June and 18 June 2013 was measured at 385.1 mm, against the normal rainfall of 71.3 mm,^[9] which was in excess by 440 per cent. The rain was caused by convergence of the southwest monsoon and westerly disturbances that lead to the formation of dense clouds over Uttarakhand. The Rudraprayag district and surrounding areas experienced severe flooding as a result of the Mandakini River erupting due to heavy rain which resulted in elevated river The torrent of water that rushed down from the Kedarnath and Rambara regions delivered a massive silt load that was made up of enormous rock boulders which washed away everything that came its way. Additionally, the massive amount of water caused excessive erosion throughout the region, which led to colossal landslides.

Human Interference that Triggered the 2013 Kedarnath Tragedy

Besides natural and environmental factors, the 2013 Kedarnath tragedy was also instigated by human interference. These were:

• State government’s casual approach: Warnings issues by the Indian Meteorological Department (IMD), Delhi, were not heeded by the state government. The first such warning was given on June 13, 2013 when rainfall was recorded at 35.6-64.44mm. Daily warnings were given thereafter, with a warning being given on June 16 and 17 of expected rainfall of more than 244.5mm^[10]. All of these were ignored by the state government.
• Ignorance of the locals and the government: The local people of the area had constructed houses on the west stream of the Mandakini River that had been dry for When the river returned to its original course as the calamity arrived, these constructions were washed   away. The government and locals both are to be blamed for poor housing designs, cheap materials used (un-burnt bricks and mud) and wrong housing development techniques. The locals also indulge in disposing of waste, plastic bottles, polythene bags etc in the rivers that added to the chances of the disaster taking shape.
• Population Explosion: An increase in population had put pressure of immense magnitude upon the entire Kedarnath and Uttarakhand region which became one of the reasons for the disaster. The average population density per sq. km in the state of Uttarakhand in the year 2001 was recorded at 84.89. By 2011, this had increased to 100.86.^[11]
• Deforestation: The cutting down of trees and bushes for construction of roads and other infrastructure, led to soil erosion which made the entire region of Uttarakhand, and Kedarnath in particular, vulnerable to devastating landslides and floods.
• Discarding the bodies of mules and ponies in the rivers: In the Mandakini River, which emerges from Chorabari glacier and mixes with Ganga, hundreds of dead mules are dumped. Besides contaminating the river, this also obstructs the water flow in the river. The bodies of dead animals, are many a times left on the path to the temple which not just leads to foul smell due to decomposition but also pollutes the divine environment of the shrine.^[12]
• Unregulated promotion of tourism: Pulling international and national tourists to Uttarakhand did increase revenue of the state but it also added greatly to the 2013 tragedy. For people staying in the regions of Delhi, NCR and adjoining areas, Uttarakhand became a second home. The upsurge in the number tourists and pilgrims also opened doors for hotels, motels, lodges, restaurants, small time vendors and more. This added to the 2013 Kedarnath tragedy. It is to be noted that from 2000-2010 the number of tourists increased by 300% (from 1.11 crore to 3.11 crore).^[13]
• Unmindful and erroneous construction: Lack of environmentally sustainable development and ignorance towards existing flaws became a major reason for the Kedarnatha 2013 tragedy. This included construction of roads, bridges and other structures in landslide prone areas, steep slope foundations and unsuitable places. Riverbeds were recklessly mined for sand, and due to the accumulation of construction debris, land contours and rivers changed their flow. Construction of hydroelectric dams in this sensitive region also paid scant heed to environmental concerns. It is to be noted that there are seventy large dams in Uttarakhand region and 680 incomplete dams that were present before the Kedarnath 2013 tragedy. The drainage systems were also faulty. New structures were constructed on old and feeble drains which acted as a barrier towards rainwater. Finally, there was a lack of education and awareness of multiple issues with respect to preserving the environment and of dealing with disasters.

Eco-consciously Reconstructing Kedarnath’s Cultural Heritage (2014-2022) 

Post the 2013 disater, the Modi government came up with a well-thought-off plan to rebuild Kedarnath in an ecologically conscious and conceptually sound manner. The eco-conscious hill-town developmental plan of Kedarnatha was quick in receiving the Platinum Indian Green Building Council Grading (IGBC).^[14] A risk mitigation strategy is added to it, and it includes recruiting and educating community marshals as well as managing hazardous conditions. A vernacular architectural style has been adopted for all buildings using local construction materials, technology and craftsmen. In order to make Kedarnath a world class pilgrimage mountain town, the development will revolve around the 3PECH Formula (preservation, protection and promotion of Environment, Culture and Heritage).^[15]

.                                                                                          Source: Self

Fig.3. 3PECH Formula for the Protection, Preservation and Promotion of Environment, Culture and Heritage at Kedarnatha

Significant developments that have taken place post 2013 Kedarnath tragedy under Prime Minister Modi are:

1. Adi Shankaracharya Samadhi and virtual museum: On 5th November 2021, PM Modi inaugurated Jagadguru Adi Shankaracharya’s Samadhi and the virtual museum.^[16] The museum embodies Bharatavarsha’s rich heritage, culture and furthers Adi Shankaracharya’s The 12 feet high statue of Adi Shankaracharya weighing 35 tons is placed atop a Shriyantara. Sculpted by the Mysore based sculptor Arjun Yogiraj, the samadhi and statue symbolise the country’s rich heritage, culture, literature, art and environmental consciousness.
2. Smriti Vana Memorial: The Smriti Vana Memorial came into existence on June 17, 2019 in the memory of the people who lost their lives during the 2013 Kedarnatha t^[17] The Smriti van memorial park is creatively utilising all large boulders that came down from landslides during the mishap. No other material has been used in developing the Smriti Vana Memorial other than the natural boulders and native vegetation. This Memorial Vana also promotes eco-awareness, preserves indigenous plants and fosters a culture that contributes to the preservation of the entire area. Additionally, it will be developed as an ecotourism destination where visitors can commune with nature and find inspiration to conserve and protect the environment.
3. Three Meditation Caves along the Kedarnatha route: To preserve and promote the culture of silence, dharana, dhyana, Samadhi and yoga, three mauna meditational caves have been developed along the route to The caves are administered by the Garhwal Mandal Vikas Nigam (GMVL).^[18] These caves will not only promote the ‘Bhartiya Parampara’ that is rooted spirituality but will also add aesthetic value to the scenic beauty of the Kedarnatha route. Each cave is well equipped with electricity, water and toilets. Shri Narendra Modi, in 2019, meditated for 17 hours at the Rudra Gufa.^[19] This cave is an underground cave constructed by the Nehru Mountaineering Institute. Also known as “Dhyana Gufa”, it is barely half a kilometre from the main Kedarnath shrine.^[20]
4. Construction of the 12.5 km Sonprayaga-Gaurikunda-Kedarnath Ropeway and Animal Welfare: The 12.5 km^[21] ropeway to Kedarnath, bridges the gap between Sonprayag and Kedarnath. However, this stretch remains an extremely eco-sensitive region. Since the Kedarnath development pledges to be eco-conscious while also ensuring the preservation of cultural and historical value of the site, it went through an entire process of acquiring approvals from the National Board for Wildlife (NBWL). With the construction of this ropeway, at a cost of Rs 1200 crore, the distance between Sonprayag to Kedarnath Dham will be greatly reduced. When completed, this ropeway will be the longest ropeway in Uttarakhand and at 11,500 feet, the highest ropeway in the world.

.                                                                                            Source: Self

5. Saraswati-Mandakini Ghats & Retaining wall: After the 2013 floods, a huge amount of water began gushing down the Mandakini and Saraswati rivers along with volumes of debris. Damage of immense magnitude was done to the river edges. To avoid any such devastation in future, a 350-meter-long river edge, pitra-ghats and protection walls are being developed to maintain our heritage and also provide protection against any unforeseen circumstances. These developments will take place along the eastern and western banks of Saraswati-Mandakini rivers, respectively. The developments of ghats will not only provide devotees a platform to perform puja but will also ensure an aesthetic view of the region. The retaining wall will also define the flow of the rivers and will ensure protection against soil erosion. It is also important to note that these developments have taken place along the existing terrain elevation in order to avoid any major transformation to the same. This part will also have a cafeteria, washrooms, seventy purohit quarters, changing rooms, visitors facility pavilion and more. To give a visual treat to the pilgrims, and for the further development of heritage and culture, wall murals and art works will be created. Both the edges follow a slope that will not let the water stay near the temple and surrounding area. The point where Saraswati and Mandakini will meet will be known as the “Sangamghat”. Eight guest houses have also been constructed on this ghat.

5. Construction of Bio-digestible Toilets on the Kedarnatha Trek Route: Culturally Bharatavarsha has celebrated cleanliness since time immemorial. The same has been revered through ages. Be it Patanjali’s Yogasutra where “Sauca” becomes the first pillar of Niyama or Adi Shankaracharya who stresses upon the purity of Antahkarna, cleanliness becomes the first step towards knowledge, wisdom and spirituality. The earlier trek route to Kedarnath shrine had no facility of toilets which made the journey extremely difficult. Now, 323 toilets have been built along the route to Kedarnath. The Kedarnath Dham now prides itself with DRDO (Defense Research and Development Organisation) designed bio-digestible toilets.^[22] These toilets are unique and degenerate waste in an environmentally friendly way with the help of bacteria that anaerobically digest the waste. These toilets are also portable and can be stationed anywhere.^[23]
6. Waste Management at Kedarnatha Area: In May 2022, a picture of garbage pile at Kedarnath went viral on the internet. After a thorough investigation, it came to light that many pilgrims who visited the site had littered carelessly and this became a national concern. Whilst the public is being educated on this issue, the government is also devising strategies to meet the challenges of food waste, temple waste, bio-medical waste, rural solid waste, construction and demolition waste, hazardous waste, electronic waste, plastic waste, water waste and sewage treatment, ground water contamination, recharge and extraction, air and noise pollution, illegal mining and more. Further, systems like the Recykal Deposit Refund System (deposit a plastic bottle and get a refund of Rs10), Material Recovery Facility (for picking up dry waste), Micro Auto Gastification System (MAGS) and Smart Xpress Composter System (SXCS) have also come into being to strengthen the waste management system. Although, there is a 3R method to deal with waste (Reduce-Reuse-Recycle), this paper suggests the following 5R^[24] method in order to deal with the same.

.                                               Fig.14. Suggested 5R approach for waste management

8. Intelligent Traffic Management System and Pedestrian Friendly Pathways: The pathway for pilgrims has been defined and is predominantly connected through public spaces such as the temple path, Saraswati Ghat and temple These paths are guided by way finding signage. “Specially able  people,” emergency and supporting services will move along the peripheral path through battery operated/electronic vehicles (ATV – All Terrain Vehicles). These electric vehicles will be managed by the control decks situated along the Mandakini River. Being a prominent pilgrim site, it was important to create circulation of the crowd during peak hours. Thus, a pathway towards the main shrine has been developed in a manner that allows a person to reach the temple in a span of 8-10 minutes. The site is also universally accessible and barrier free. The pathways comprise of street guidelines that incorporate public facilities i.e., benches, luminaries, dustbins, planters and sculptures.

8. IT Connectivity and Digitisation: The site is enabled with radio frequency based local internet network, presently used to provide essential services such as Wi-Fi by point to point and point to multipoint wireless communication system. The area is also well equipped with “Smart Public Addressal System” through which wireless outdoor speakers can be operated, these speakers are durable and can stand harsh weather conditions.
9. Eco-friendly Street Lighting System: The street lights will be high-end in technology however they will be operated by solar energy and thus they will be environmentally
10. Disaster Management System: A sensitive place like Kedarnath that is prone to earthquakes and floods requires a strong Disaster Management System. Therefore, risk mitigation through preparation of disaster risk reduction plan has been put in place. Further, identification, training and retraining programs related to dealing with such disasters have been developed. Building of proper civil infrastructure i.e., retaining walls, embankments and more have been developed to reduce devastation of immense magnitude during natural calamities. The area is also being well equipped with the provision of evacuation plan, disaster shelters and refuge centres that can shelter 28,000 people during catastrophes.
11. Laser/Light and Sound show: A laser light and sound show at the Kedarnath temple has been conceived as a means of cultural development. The show is called “Adi Ananta Shiva.” This 25-minute show will depict the association of Lord Śiva with Kedarnath area. It will also story-tell the great epic Mahabharata and will further showcase the 2013 tragedy. The aim of this show is “cultural and historical learning through entertainment and storytelling.” The laser-light show effectively turns the temple’s left wall into a giant “screen” for a spectacular display. This show is operational 7 days a week. The same will further become a source of employment and livelihood for many locals.

Conclusion

The 2013 Kedarnath tragedy was not merely an “Act of God/ Nature,” but also involved considerable human involvement and governmental incompetence. However, after the catastrophe, changes were undertaken based on recognising the errors of the previous administration and emphasising environmental conscious development. It is crucial to realise that any growth carried out at the expense of Mother Nature cannot be either sustainable or advantageous. The Hon’ble Prime Minister of India, Shri Narendra Modi has frequently discussed environmentally conscious and holistic development. In fact, he is the first Indian prime minister to actively promote the advancement of nature, stray animals, and wildlife in addition to human development and upliftment.

Without a doubt, Advaitavada, as propounded by Jagadguru Adi Shankaracharya is the spirit of Bharatavarsha. Advaitavada also becomes the conclusive thought of the Vedic and Upaniṣadic literature. According to Advaitamata, everything manifests from the Supreme Brahman, lives in “It” and finally merges back into its source. Since, Advaitavada is the fundamental guiding principle of Bharatvarsha’s ethical, social, political, religious, environmental and overall thought and practice, every development should keep Advaitavada at its core for the well-being of all creatures. Advaitavada is not limited to human beings nor is it human centric as in case of Abrahamic faith systems. In fact, it sees the entire creation as a single unit and fosters no preference towards any creature, specie or being. Thus, keeping Advaitavada as the guiding philosophy at Kedarnath Dham, it is suggested that the developments taking place must be for the overall wellness of all beings (humans, animals, trees, rivers and more).

Mahatma Gandhi, gave us the practical philosophy of Antodaya, Sarvodaya, and Gramswaraja which have their roots in Advaitavada. According to Antodaya, the last being of the society must be provided with the necessities to live a life of harmony and peace. When all beings are rooted in harmony, it will automatically lead to Sarvodaya, which professes that there must be upliftment of all lives without discrimination towards any. When every life is taken care of and there is holistic development, it will become the foundation of Gramswaraja. The same professes that every village should be a self-sufficient unit that is independent and self-reliant. It is to be understood that limiting Antodaya, Sarvodaya and Gramswaraj to merely human kind is downgrading the very philosophy of Mahatma Gandhi. The same must be understood in a holistic fashion and must take into account all beings from a crawling ant to the humongous mountain. Here it also becomes imperative to highlight Buddha’s Pratityasamutapada or the theory of interdependence. It must be lucidly understood that we are not independent units. Our independence, birth, growth and sustenance are directly proportional and dependent upon various beings. Thus, in the wellness of all lives lies our own wellness. Based upon the philosophical edicts mentioned above, following are a few suggestions that can be included in the development of Kedarnath and surrounding areas.

Environmental Measures

• Increase the number of toilets and equip every toilet with sanitary napkins.
• Removing mules from Kedarnath Area.
• Establish Mobile Veterinary Clinics. Also, employ ‘pashu Mitra’s’ who should be trained as Para-vets.

Economical and Social Measures.

• Construction and promotion of of Hunar Hatt and Uttarakhand Bhoj Anand under Vocal for Local for encouraging local art, handicraft, regional delicacies and cuisines of Uttarakhand.
• Construction Vocational Training Centres for skill development.
• Popularise Kedarnath Wildlife Sanctuary.
• Inviting Scholars from India and Abroad for short-term projects on local herbs, art, architecture, culture, environment and more.

Author Brief Bio: Dr. Vandana Sharma ‘Diya’ is a Post-Doctoral Fellow, Indian Council of Social Sciences Research, MoE, Academician, Indian Knowledge System, MoC and Principal Researcher, Kedarnath Dhama, MoE.

References:

^[1]Kinsley David, Hindu Goddesses: Visions of the Divine Feminine in the Hindu Religious Tradition, Motilal Banarasidass, Delhi, 1998, pp.11,13 (Saraswatī River is mentioned in the Ṛgveda)

^[2]Skandapurana; Kedarakhanda.

^[3]Śhantiparva, Ch.35; Vanaparva, Ch.38; Lingapurana, Ch.12; Vamanapurana, Ch.36; Padmapurana, Ch.61; Kurmapurana, Ch.36;   Garudapurana, Ch.81;   Saurapurana, Ch.69;    Brahmavaivratpurana, Ch.17.

^[4] https://www.news18.com/news/india/kedarnath-shrine-was-under-snow-for-400-years-scientists-619076.html

^[5]National Institute of Disaster Management (MHA), India Disaster Report 2013, Delhi, 2014.

https://nidm.gov.in/pdf/pubs/india%20disaster%20report%202013.pdf.

^[6] Kedarnatha Temple remains open to public between Akshaye Tritiya (April) and Kartik Purnima (November).

^[7] National Institute of Disaster Management (MHA), India Disaster Report 2013, Delhi, 2014

^[8]The Australian continent and its surrounding seas are part of the Indo-Australian Plate, a significant tectonic plate that also stretches northwest to include the Indian subcontinent and nearby oceans. It was created around 43 million years ago when Indian Ocean’s mid-ocean ridge, which had been separating the two plates, stopped spreading, and merged with the Australian plate.

^[9] National Institute of Disaster Management (MHA), India Disaster Report 2013, Delhi, 2014.

^[10] Ministry of Home Affairs, Kedarnath Warning, Delhi, 2013. https://www.mha.gov.in/MHA1/Par2017/pdfs/par2013-pdfs/rs-070813/385.pdf

^[11] National Institute of Disaster Management, Uttarakhanda Disaster 2013, Ministry of Home Affairs, Delhi, 2015.p.29 https://nidm.gov.in/pdf/pubs/ukd-p1.pdf

^[12]  (i)Shivani Azad, Carcasses of dead mules in Kedarnath thrown into Mandakini, Times of India, 2022, Carcasses of dead mules in Kedarnath thrown into Mandakini, http://timesofindia.indiatimes.com/articleshow/91796427.cms?utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.

(ii) Interview with Mrs.Gauri Mulekhi, Trustee, People for Animals.

^[13] National Institute of Disaster Management, Uttarakhanda Disaster 2013, Ministry of Home Affairs, Delhi, 2015.p.30 https://nidm.gov.in/pdf/pubs/ukd-p1.pdf

^[14] On information gathered from Sh.Puneet Aggarwal, The Counselor at Indian Green Building Council (www.igbc.in)

^[15] Developed by Dr.Vandana Sharma ‘Diya’

^[16] Asian News International, PM Modi unveils Shri Adi Shankaracharya Samadhi and statue in Kedarnath, Uttarakhanda, 2021.

https://www.aninews.in/news/national/general-news/pm-modi-unveils-statue-of-adi-shankaracharya-at-kedarnath20211105093620/

^[17]  The Statesman, Smriti Van created in the memory of Kedarnath disaster victims, Dehradun, 2019

‘Smriti Van’ created in memory of Kedarnath disaster victims

^[18] Sacred Yatra, https://www.sacredyatra.com/rudra-meditation-cave-kedarnath.html

^[19] The Week, Kedarnath cave where Modi meditated, Uttarakhanda, 2019.

https://www.theweek.in/news/india/2019/05/19/kedarnath-cave-where-modi-meditated-equipped-with-wifi-telephone-toilet.html

^[20] E-uttaranchala, Rudra Cave Kedarnatha,  https://www.euttaranchal.com/tourism/rudra-cave-kedarnath.php

^[21] National Highways Logistic Management Ltd, Ropeway, Delhi, 2016, http://nhlm.in/ropeway.html

^[22] https://www.chardhamtour.in/bio-digester-toilets-on-the-routes-of-char-dham-route.html

^[23] https://www.drdo.gov.in/bio-digester

^[24] Conceptualized by Dr.Vandana Sharma

“The future belongs to those who prepare for it today.” – Malcolm X

Introduction

 

In today’s increasingly digitally connected world, Web 3.0 and blockchain technology hold the promise to revolutionise and transform the way nations and societies interact and conduct business. The Indian Ocean Region (IOR) and the Group of Twenty (G20) have gained strategic importance due to their immense economic potential and geopolitical significance. India’s leadership in the G20 and the IOR is crucial for promoting regional and global stability, prosperity, and cooperation. As a rapidly digitising nation, India has a unique opportunity to leverage cutting-edge technologies such as Web 3.0 and blockchain to stimulate economic growth, enhance governance and transparency, and foster social inclusion.

 

Web 3.0 and blockchain technology signify the “next digital revolution.” Web 3.0, also known as the decentralised web, represents the forthcoming generation of the internet, allowing users to connect and interact without relying on centralised entities such as tech giants and governments. This transition provides users with enhanced control, privacy, and security. Blockchain technology, a decentralised ledger, facilitates secure, transparent, and tamper-proof transactions. It enables the creation of digital currencies like Bitcoin and Ethereum, as well as smart contracts that automate and secure transactions. Together, Web 3.0 and blockchain technology can transform the way the world interacts, transacts, and governs by creating more open, democratic, and equitable systems, empowering nations, societies, and individuals to exert greater control over their digital content.

 

Both Web 3.0 and blockchain technology possess the potential to decentralise power, increase transparency, and bolster security. These features can be particularly beneficial within the G20 and IOR, where corruption, lack of transparency, and security concerns pose significant challenges to economic and social development.

 

Applications of Web 3.0 and blockchain technology

 

Web 3.0 and blockchain technology have a wide range of applications across various sectors, such as finance, healthcare, supply chain management, governance, and cybersecurity. Notable examples include:

1. Cross-border payments: Facilitating secure, swift, and cost-effective international transactions.
2. Land records management: Ensuring transparent and tamper-proof property ownership records.
3. Intellectual Property Rights (IPR) management: Enhancing transparency and reducing infringement risks.
4. Voting systems: Strengthening electoral integrity and security.
5. Agriculture and food supply chain finance systems: Streamlining financing and improving traceability.
6. Cybersecurity: Utilising blockchain-based systems to mitigate cyberattack risks and enhance response times.
7. Decentralised e-commerce systems: Encouraging secure, transparent, and cost-effective online transactions.
8. Smart city infrastructure: Establishing secure, transparent, and interoperable urban management systems.
9. Healthcare supply chains: Combating counterfeit drugs and medical devices while reducing costs and improving traceability.
10. Public transportation: Enhancing fare collection, lowering operational costs, and improving passenger experience.
11. Gaming platforms: Ensuring asset ownership, mitigating fraud risks, and elevating the gaming experience.
12. Social media platforms: Boosting data privacy, diminishing fraud risks, and empowering users to control their personal data.
13. Real estate: Minimizing fraud risks, increasing transparency, and reducing transaction fees.
14. Intellectual property licensing: Lowering infringement risks, promoting transparency, and decreasing transaction costs.
15. Aviation: Advancing data sharing, cutting operational costs, and bettering passenger experience.
16. Humanitarian aid supply chains: Guaranteeing timely delivery and efficient tracking.
17. Education: Facilitating data sharing, minimizing costs, and elevating the quality of education.
18. Digital identity verification: Lessening identity theft, improving access to essential services, and protecting privacy.
19. Telecommunications: Streamlining data sharing, cutting costs, and enhancing the quality of communication services.
20. Government services: Curbing corruption, fostering data sharing, and improving the quality of public services.
21. Energy management: Augmenting data sharing, minimizing operational costs, and encouraging sustainability.

 

India has already made significant strides in adopting these technologies. In fact, India ranks among the top five countries for blockchain patents filed, and the government is exploring the use of blockchain in various applications, including land records, healthcare, and supply chain management. Initiatives like the National Strategy on Blockchain demonstrate India’s commitment to being a global leader in this space.

 

Significance of adopting Web 3.0 and blockchain technology in India

 

Embracing these technologies will bolster India’s leadership on the globe through various means, such as:

1. Fostering technological innovation: To maintain India’s competitive edge in the global economy, it is crucial to stay ahead in technological advancements. By adopting Web 3.0 and blockchain technology, India can drive innovation and create new growth opportunities.
2. Good governance and tackling corruption: Blockchain technology can enhance transparency and accountability in governance, reducing corruption and increasing public trust. For regional cooperation, multilateralism, and global good governance, these technologies can provide efficient, transparent, and secure channels.
3. Strengthening cybersecurity: Web 3.0 and blockchain technology can bolster India’s cybersecurity infrastructure, making data more secure and less susceptible to cyber-attacks.
4. Expanding digital financial services: India can utilize blockchain technology to provide secure, cost-effective, and inclusive financial services to its citizens, particularly those in rural and remote areas.

 

In comparison to the current Web 2.0 technology, Web 3.0 offers more decentralised and secure systems capable of addressing key challenges such as data privacy, security, and transparency. Essential features of Web 3.0 technology, like smart contracts, decentralised applications, and digital tokens, present new possibilities for constructing robust and sustainable digital ecosystems. As the digital revolution progresses, a widespread shift from Web 2.0 to Web 3.0 systems is expected, leading to the integration of these applications across industries and sectors.

 

Where to choose Web 3.0 over Web 2.0?

 

The following are a few examples of use cases where Web 3.0 can be advantageous over Web 2.0 in the context of India’s leadership in the Indian Ocean Region (IOR) and G20. These are some of the instances where currently India’s interactions with G20 and IOR countries face challenges and how Web 3.0 technology can potentially resolve these issues:

 

India and China: Long-standing border disputes between India and China have led to tensions between the two nations. Current Web 2.0-based dispute resolution mechanisms often prove slow and ineffective, resulting in prolonged disputes and increased costs. Web 3.0-based decentralised dispute resolution mechanisms can provide more efficient and transparent resolutions, reducing the risks of prolonged disputes and lowering costs.

 

India and the US: While India and the US maintain close economic and strategic ties, the current Web 2.0-based logistics systems present challenges, leading to inefficiencies and higher costs. Web 3.0-based decentralised logistics systems can offer more secure, transparent, and efficient logistics management, reducing operational costs and improving efficiency, thereby enhancing the economic relationship between the two countries.

 

India and Myanmar, Pakistan: Web 2.0 technology-based voting systems frequently suffer from fraud, errors, and a lack of transparency. With the aid of Web 3.0-based decentralised voting systems, countries can rely on more secure and transparent methods for conducting elections. For example, blockchain-based voting systems can help reduce the risks of electoral fraud and improve voter turnout.

 

India and Australia: India and Australia share close economic ties, but challenges exist with the current Web 2.0 technology-based supply chain management systems, leading to inefficiencies and higher costs. Web 3.0-based decentralised supply chain management systems can provide real-time visibility and traceability of goods, reducing operational costs and improving efficiency, thereby enhancing the economic relationship between the two countries.

 

India and Indonesia: As part of the IOR region, both India and Indonesia face challenges with the current Web 2.0 technology-based logistics systems, resulting in inefficiencies and higher costs for agricultural products. Web 3.0-based agriculture data management systems can offer more secure, transparent, and efficient logistics management, reducing operational costs and enhancing the quality of agricultural products, thereby improving trade and economic ties between the two countries.

 

India and Japan: Although India and Japan enjoy close economic and strategic ties, challenges with the current Web 2.0 technology-based intellectual property rights systems result in infringement issues and poor record-keeping. Web 3.0-based decentralised intellectual property rights systems can ensure that rights holders maintain complete control over their IP, reducing the risks of infringement and lowering transaction costs, thereby enhancing the economic relationship between the two countries.

 

India and Saudi Arabia: Close economic and strategic ties exist between India and Saudi Arabia, but challenges with the current Web 2.0 technology-based supply chain management systems lead to inefficiencies and higher costs. Web 3.0-based decentralised supply chain management systems can provide real-time visibility and traceability of goods, reducing operational costs and improving efficiency, thereby enhancing the economic relationship between the two countries.

 

India and Brazil: India and Brazil share close economic and diplomatic ties, but challenges with the current Web 2.0 technology-based healthcare data management systems lead to a lack of interoperability and poor data sharing. With Web 3.0-based decentralised healthcare data management systems, secure and transparent data sharing between different stakeholders becomes possible, reducing operational costs and enhancing patient privacy, thereby strengthening healthcare ties between the two countries.

 

India and France: India and France maintain close strategic and diplomatic ties; however, challenges with the current Web 2.0 technology-based environmental monitoring systems result in a lack of transparency and data quality issues. Web 3.0-based decentralised environmental monitoring systems can provide secure and transparent data sharing between different stakeholders, ensuring data quality and enhancing sustainability efforts, which will improve environmental ties between the two countries.

 

India and South Africa: India and South Africa have close economic and strategic ties, but current Web 2.0 technology-based energy management systems present challenges, including a lack of interoperability and poor communication channels. With Web 3.0-based decentralised energy management systems, secure and transparent data sharing between different stakeholders can be achieved, reducing operational costs and enhancing sustainability, thereby strengthening the energy ties between the two countries.

 

India and Mauritius: India and Mauritius share close economic and cultural ties, but challenges with the current Web 2.0 technology-based agriculture data management systems lead to poor data sharing and a lack of transparency. Web 3.0-based decentralised agriculture data management systems can provide secure and transparent data sharing between different stakeholders, reducing operational costs and enhancing the quality of agricultural products, thereby improving agricultural ties between the two countries.

 

India and Singapore: India and Singapore enjoy close economic and strategic ties, but challenges exist with the current Web 2.0 technology-based digital identity verification systems, resulting in a lack of security and transparency. Web 3.0-based decentralised digital identity verification systems can provide secure and transparent identity verification, reducing the risks of identity theft and fraud while enhancing privacy, thereby strengthening digital ties between the two countries.

 

India and Thailand: India and Thailand maintain close economic and cultural ties, but current Web 2.0 technology-based tourism systems present challenges, such as a lack of transparency, inefficiencies, and poor customer experience. Web 3.0-based decentralized tourism systems can provide secure and transparent data sharing between different stakeholders, reducing operational costs and enhancing the customer experience, thereby improving tourism ties between the two countries.

 

India and UK: India and the UK share close economic and diplomatic ties, but challenges with the current Web 2.0 technology-based intellectual property rights systems lead to infringement issues and poor record-keeping. Web 3.0-based decentralised intellectual property rights systems can ensure that rights holders maintain complete control over their IP, reducing the risks of infringement and lowering transaction costs, thereby enhancing economic ties between the two countries.

 

India and Iran: India and Iran have close economic and cultural ties, but challenges with the current Web 2.0 technology-based agriculture data management systems result in poor data sharing and a lack of transparency. With Web 3.0-based decentralised agriculture data management systems, secure and transparent data sharing between different stakeholders becomes possible, reducing operational costs and enhancing the quality of agricultural products, thereby strengthening agricultural ties between the two countries.

 

India and UAE: India and the UAE maintain close economic and strategic ties; however, challenges with the current Web 2.0 technology-based logistics systems lead to inefficiencies and higher costs. With Web 3.0-based decentralised logistics systems, more secure, transparent, and efficient logistics management can be achieved, reducing operational costs and improving efficiency, thereby enhancing the economic ties between the two countries.

 

India and Russia: India and Russia share close strategic and diplomatic ties; however, challenges with the current Web 2.0 technology-based intellectual property rights systems lead to infringement issues and poor record-keeping. With Web 3.0-based decentralised intellectual property rights systems, rights holders can maintain complete control over their IP, reducing infringement risks and lowering transaction costs, thereby strengthening the economic ties between the two countries.

 

India and South Korea: India and South Korea have close economic and strategic ties, but challenges exist with the current Web 2.0 technology-based digital identity verification systems, resulting in a lack of security and transparency. Web 3.0-based decentralised digital identity verification systems can provide secure and transparent identity verification, reducing the risks of identity theft and fraud while enhancing privacy, thereby improving digital ties between the two countries.

 

India and Tanzania: India and Tanzania share close cultural and economic ties, but challenges with the current Web 2.0 technology-based energy management systems lead to inefficiencies and higher costs. With Web 3.0-based decentralised energy management systems, more secure, transparent, and efficient energy management can be achieved, reducing operational costs and enhancing sustainability, thereby strengthening the economic ties between the two countries.

 

India and Bangladesh: India and Bangladesh maintain close economic and diplomatic ties; however, challenges with the current Web 2.0 technology-based healthcare data management systems result in a lack of interoperability and poor data sharing. Web 3.0-based decentralised healthcare data management systems can provide secure and transparent data sharing between different stakeholders, reducing operational costs and enhancing patient privacy, thereby improving healthcare ties between the two countries.

 

India and Canada: India and Canada share close economic and strategic ties, but challenges with the current Web 2.0 technology-based intellectual property rights systems lead to infringement issues and poor record-keeping. With Web 3.0-based decentralised intellectual property rights systems, rights holders can maintain complete control over their IP, reducing infringement risks and lowering transaction costs, thereby enhancing economic ties between the two countries.

 

India and Malaysia: India and Malaysia maintain close cultural and economic ties; however, challenges with the current Web 2.0 technology-based financial services systems result in inefficiencies and poor access to financial services. Web 3.0-based decentralised financial services systems can provide secure and transparent financial services, reducing operational costs and improving financial inclusion, thereby strengthening the economic ties between the two countries.

 

India and Maldives: Web 2.0 technology-based healthcare systems often suffer from data privacy and security issues, leading to a lack of trust among patients and healthcare providers. With Web 3.0-based decentralised healthcare systems, countries can rely on more secure and transparent systems for managing patient data. For instance, the use of blockchain-based health records can help reduce medical errors and improve patient outcomes.

 

India and Seychelles: Web 2.0 technology-based tourism systems often suffer from a lack of transparency, inefficiencies, and poor customer experience. With Web 3.0-based decentralised tourism systems, countries can rely on more secure, transparent, and efficient systems for managing the tourism industry. For instance, the use of blockchain-based tourism systems can help improve data sharing, reduce operational costs, and enhance the customer experience.

 

India and Sri Lanka: Web 2.0 technology-based logistics systems often suffer from a lack of transparency, inefficiencies, and poor supply chain management. With Web 3.0-based decentralised logistics systems, countries can rely on more secure, transparent, and efficient systems for managing logistics. For instance, the use of blockchain-based logistics systems can help improve data sharing, reduce operational costs, and enhance the efficiency of the logistics industry.

 

India and Oman: India and Oman have close cultural and economic ties, but there are challenges with the current Web 2 technology-based energy management systems, leading to inefficiencies and higher costs. With Web 3-based decentralised energy management systems, it is possible to provide more secure, transparent, and efficient energy management, reducing operational costs and enhancing sustainability, thereby enhancing the economic ties between the two countries.

 

India and Sri Lanka: India and Sri Lanka have close cultural and economic ties, but there are challenges with the current Web 2 technology-based healthcare data management systems, leading to the lack of interoperability and poor data sharing. With Web 3-based decentralised healthcare data management systems, it is possible to provide secure and transparent data sharing between different stakeholders, reducing operational costs, and enhancing patient privacy, thereby enhancing the healthcare ties between the two countries.

India and Egypt: India and Egypt have close cultural and economic ties, but there are challenges with the current Web 2 technology-based energy management systems, leading to inefficiencies and higher costs. With Web 3-based decentralized energy management systems, it is possible to provide more secure, transparent, and efficient energy management, reducing operational costs and enhancing sustainability, thereby enhancing the economic ties between the two countries.

India and Myanmar: India and Myanmar have close economic and cultural ties, but there are challenges with the current Web 2 technology-based agriculture data management systems, leading to poor data sharing and the lack of transparency. With Web 3-based decentralised agriculture data management systems, it is possible to provide secure and transparent data sharing between different stakeholders, reducing operational costs and enhancing the quality of agricultural products, thereby enhancing the agricultural ties between the two countries.

India and Germany: India and Germany have close economic and strategic ties, but there are challenges with the current Web 2 technology-based environmental monitoring systems, leading to the lack of transparency and data quality issues. With Web 3-based decentralised environmental monitoring systems, it is possible to provide secure and transparent data sharing between different stakeholders, ensuring data quality and enhancing sustainability efforts, thereby enhancing the environmental ties between the two countries.

India and Qatar: India and Qatar have close diplomatic and economic ties, but there are challenges with the current Web 2 technology-based remittance systems, leading to inefficiencies and higher costs. With Web 3-based decentralised remittance systems, it is possible to provide more secure, transparent, and efficient remittance management, reducing operational costs and improving efficiency, thereby enhancing the economic ties between the two countries.

India and Mexico: India and Mexico have close economic and cultural ties, but there are challenges with the current Web 2 technology-based healthcare data management systems, leading to the lack of interoperability and poor data sharing. With Web 3-based decentralized healthcare data management systems, it is possible to provide secure and transparent data sharing between different stakeholders, reducing operational costs, and enhancing patient privacy, thereby enhancing the healthcare ties between the two countries.

India and Turkey: India and Turkey have close economic and diplomatic ties, but there are challenges with the current Web 2 technology-based financial services systems, leading to inefficiencies and poor access to financial services. With Web 3-based decentralised financial services systems, it is possible to provide secure and transparent financial services, reducing operational costs, and improving financial inclusion, thereby enhancing the economic ties between the two countries.

India and Kenya: India and Kenya have close cultural and economic ties, but there are challenges with the current Web 2 technology-based supply chain management systems, leading to inefficiencies and higher costs. With Web 3-based decentralised supply chain management systems, it is possible to provide real-time visibility and traceability of goods, reducing operational costs and improving efficiency, thereby enhancing the economic ties between the two countries.

India and Vietnam: India and Vietnam have close economic and diplomatic ties, but there are challenges with the current Web 2 technology-based real estate systems, leading to inefficiencies and poor transparency. With Web 3-based decentralised real estate systems, it is possible to provide secure, transparent, and efficient real estate management, reducing operational costs and improving transparency, thereby enhancing the economic and diplomatic ties between the two countries.

Capitalising on Web 3.0 and Blockchain Technologies

Economic Development: Blockchain technology can enhance supply chain efficiency, reduce transaction costs, and prevent fraud in the IOR. By creating a blockchain-based trade platform, India can position itself as a regional trade hub, fostering economic growth and promoting regional cooperation. This will encourage blockchain technology usage in the region and reduce trade barriers, thus increasing economic growth. For example, India can collaborate with other G20 and IOR countries to create a regional blockchain network that tracks the movement of goods and services across the region, increasing the efficiency of cross-border trade and reducing the cost of doing business.

Diplomatic Relations: Web 3.0 and blockchain technology can strengthen diplomatic relations by promoting transparency and reducing the risk of misunderstandings. India can use blockchain technology to improve the transparency of aid and development programs in the region, building trust with other IOR countries and promoting cooperation on common issues like climate change and counter-terrorism.

Security: India can enhance its security and defence capabilities and influence in the IOR by using Web 3.0 and blockchain technology to establish a tamper-proof, decentralised, and secure communication channel for sharing maritime intelligence. This will catalyse strategic partnerships with G20, IOR nations, and international organisations to develop a collaborative maritime security platform, including capacity-building initiatives and technology transfer agreements. For example, India can develop a blockchain-based maritime security platform that securely shares critical maritime data, such as Automatic Identification System (AIS) data, among IOR nations. Blockchain technology can also be used to enhance the security of critical infrastructure, like ports and power plants, which are vulnerable to cyberattacks.

Digital Infrastructure Development: India can capitalise on its digital prowess to create blockchain-powered infrastructure projects in the IOR, further asserting its leadership role and enhancing regional connectivity. For instance, India can develop a blockchain-enabled digital payments platform for the IOR, enabling seamless cross-border transactions and fostering economic integration among partner nations.

Environmental and Disaster Management: India can leverage blockchain technology to address environmental and disaster management challenges in the IOR, building resilience and promoting regional cooperation. For example, India can create a blockchain-based disaster management platform that securely shares real-time disaster-related data, such as early warning alerts and resource allocation information, among IOR nations.

Key Strategies

Investing in Research and Development. India needs to invest in research and development (R&D) to encourage innovation in Web 3.0 and blockchain technology. This includes setting up research centres, partnering with leading global institutions, and supporting startups working on Web 3.0 and blockchain technologies.

Drafting and executing a facilitatory regulatory framework. India needs to develop a facilitatory and supportive regulatory framework for the growth of Web 3.0 and blockchain technology. This will help create a favourable environment for businesses and startups to innovate and thrive, while ensuring consumer protection and security.

Promoting Public-Private Partnerships (PPPs). India needs to encourage PPPs to drive the adoption of Web 3.0 and blockchain technology. Such partnerships can help leverage the strengths of both the public and private sectors, accelerating innovation and deployment of these technologies.

Focusing on capacity building and skill development. India needs to prioritise capacity building and skill development to create a workforce ready for the opportunities presented by Web 3.0 and blockchain technology. This includes developing educational programs and training initiatives that equip individuals with the necessary skills and knowledge to succeed in this digital landscape.

Implementation Methodology

The time for India to seize the Web 3.0 revolution is NOW. Upcoming events like the IOR conference and G20 summit can serve as key opportunities to showcase India’s digital commitment. By demonstrating India’s achievements and future plans, the country can position itself as a leader and influence regional and global conversations around these technologies. Key areas of focus for India during these events can include:

3. Presenting Use Cases and Success Stories: India should highlight its successful implementations of Web 3.0 and blockchain technology, showcasing the real-world impact of these technologies on various sectors, such as finance, healthcare, and supply chain management.
4. Promoting Regional Collaboration: India can use the IOR Conference and the G20 Summit as platforms to foster regional collaboration on research, development, and deployment of Web 3.0 and blockchain technology. This could involve forming strategic partnerships, sharing best practices, and engaging in joint initiatives to drive innovation and adoption.
5. Addressing Regional Challenges: India should emphasize its commitment to using Web 3.0 and blockchain technology to address regional challenges, such as climate change, poverty, and inequality. By showcasing its dedication to using these technologies for the greater good, India can bolster its image as a responsible and forward-thinking leader in the IOR.
6. Advocating for a Global Digital Agenda: India should leverage its influence at the G20 Summit to advocate for a global digital agenda that embraces Web 3.0 and blockchain technology. This could involve pushing for international standards, policy frameworks, and coordinated efforts to harness the potential of these technologies for global growth and sustainable development.

Conclusion

Web 3.0 and blockchain technology have the potential to revolutionise the way nations interact with each other and conduct business. As a major player among the G20 and IOR, India has the opportunity to use these technologies to enhance its economic, diplomatic, and security relations in the region. By adopting these technologies, India can drive innovation, improve governance, strengthen cybersecurity, and expand digital financial services. It can demonstrate its commitment to transparency and good governance, which can improve its standing in the region and attract foreign investment. The upcoming summits involving IOR and G20 countries offer platforms for India to showcase its digital prowess and reaffirm its commitment to these transformative technologies. Moreover, by collaborating with other G20 and IOR countries to create a regional blockchain network, India can promote economic growth, enhance diplomatic relations, and improve security in the region. By focusing on research and development, executing a supportive regulatory framework, promoting public-private partnerships, and prioritising capacity building and skill development, India can navigate the digital frontier and establish itself as a leader among the G20 and IOR.

Authors: Ankur Saxena is the Founder of in47.consulting and Dr. Aakansha Bhawsar is Catalyst at in47.consulting.

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The Union Budget 2023-24 has been characterised as the first budget for “Amrit Kaal”— A vision to see a transformed Bharat by the time the nation celebrates its Independence centenary on 15 August 2047. For the first time, we have a long-term road map of what Bharat should be in terms of its human and developmental index, with clear markers for reaching the desired end state over the course of the next quarter century.

This, by itself is a quantum leap forward from the incremental development policies followed for the most part since 1947. There was a hesitancy in envisioning a great and prosperous Bharat, which perhaps was a result of a socialist mind-set, mired in a philosophy that pedalled poverty as virtue and derided wealth as being sinful and corrupting. For decades since independence,  the state set about controlling the means of production and telling the people what, how and how much they could produce and at what cost. The bureaucracy became all powerful as the arbiters of the nation’s destiny and this soon morphed into a political-bureaucratic-criminal nexus.

This was a recipe for disaster and by 1990, the nation was on the verge of bankruptcy. Then came the era of reforms, which since the last decade, have taken on a more focussed approach with major initiatives like the rolling out of the GST and the JAM trinity (Jan Dhan Yojana which has provided access to India’s poor to the banking sector, Aadhar—a unique biometric identifier and the Mobile penetration). This has enabled targeted provision of benefits to millions below the poverty line with near zero pilferage and brought about a sense of inclusivity to an unparalleled extent. Rural housing, electricity access, toilets for all, are but a few of the myriad schemes which has seen wide penetration across the length and breadth of Bharat in a truly transformative manner.

Budget 2023-24 builds on the India story which saw a rejuvenation in 2014 after a decade of stalled economic reforms. There is renewed focus on digitisation, indigenous defence manufacture, green energy, transparency in government, skilling of the work force, education sector reforms and the like. A host of initiatives have been announced to unleash the full potential of all citizens. In this new Bharat, there  is little doubt that every citizen will stand up to be counted. But a slew of challenges remain.

It would be naive to think that the major powers will look on benignly as India moves ahead. A strong and economically powerful Bharat poses a threat to the economic interests of other powers. An Atmanirbhar Bharat would be an economic challenger, and with defence indigenisation taking place at a rapid rate, a rival to the worlds military industrial complex as an arms exporter. So, there will be attempts made by both India’s enemies as well as those with whom India has friendly relations, but who may view India as a serious competitor in future, to sabotage the Bharat growth story. An inkling of what the coming year holds can be seen in attempts being made to create rift in society by inciting the public. The ham-handed manner in which the BBC tried to inflame passions by making a documentary on the post-Godhra riots of 2002, is a case in point. Another is the hit job done by a US based short-seller on the Adani business group. We are now seeing fringe Khalistani elements raising their ugly heads in a clear bid at destabilising the country. We are likely to see radical Muslim elements within the country creating discord over inane issues. There will be others with perceived grievances, who will be funded by external actors like the George Soros Open Society Foundation, the Ford Foundation and the Rockefeller Foundation, all of whom, through a network of NGOs, will attempt to spread a divisive agenda. And in all this they will receive support from both China and Pakistan, who have their own axe to grind. Unfortunately, there will be elements of certain political parties who have their own agenda, who will also lend political support to such groups.

But these challenges are an intrinsic part of trying to create a strong and vibrant Bharat. But while the Government can provide the vision and the policy support, it is also up to each and every citizen to rise to the occasion, to achieve the objectives of Atmanirbharta. The nations public and private sectors too will have to play their role. The same goes for the nation’s bureaucracy. Can they measure up to the Prime Minister’s vision and play an enabling and supportive role? Therein lies the challenge.

On February 1, the Hon’ble Finance Minister Srimati Nirmala Sitharaman, presented her FY 2024 Budget to Parliament. The Hon’ble Prime Minister termed this the Amrit Kaal Budget—the budget for a golden age for India. It proved to be so. Unlike most other budgets, which are almost always criticised on multiple counts, this budget has been hailed by all stakeholders. The people of India appreciated the continued support for key welfare programs and infrastructure investment. Taxpayers loved the judicious tax cuts. Businesspeople expressed their happiness for policies supporting green growth and robust job creation. The capital markets praised the stability and continuity in policymaking. And economists were gratified to see that all the key macroeconomic parameters ranging from growth to the fiscal deficit to open market borrowings were deftly managed.

The Amrit Kaal budget was prepared under daunting circumstances. The last three years have drastically disrupted the world. The global economy has suffered from high inflationary pressures and interest rates, low investments and, more recently, a wave of layoffs in technology-based companies. Through the economic slowdown of the last three years, India has emerged as the shining star of the global economy. According to a United Nations study^[1], growth prospects in the developed world have taken a sharp downturn – with the United States and the European Union growing by a low 0.4% and 0.1% in 2023, respectively. On the other hand, India is expected to grow at close to 6% in 2023, while the average growth rate in South Asia is projected to remain at 4.4%.

From being a Fragile Five country in 2013-14, India is now among the Top Five economies in the world! The Indian government’s strong and stable fiscal policies have allowed the country’s economy to not only emerge relatively unscathed from the pandemic, but also aid the developing world. To put the Union Budget of 2023-24 in context, it is important to understand how the major events of the past three years have impacted the world economy.

• Covid-19 Pandemic: Following the once-in-a-century pandemic, the World Bank projected the growth of the developing world, much like Covid-19 vaccine accessibility, to be quite uneven. As a result, Low-Income Countries (LICs) have fallen into extreme poverty due to rising food and energy insecurity. As per the Bank’s projections^[2], LICs with extreme poverty over 50% will rise to a positive figure by 2024, as opposed to the pre-pandemic expectation of poverty reduction. The strict, yet poorly managed, lockdowns in China have also impacted supply chains and global trade even as the world starts to recover from the pandemic.
• Russia-Ukraine War: The conflict has had significant spill over effects on both the South Asian and global economy due to disrupted supply chains and increased food and energy prices. The impact was further magnified due to increased energy requirements, owing to climate change and disrupted energy supply following the war. As median inflation^[3] reached a new high of 9% in the second half of 2022, central banks around the world tightened monetary policy, reducing inflation but temporarily slowing down growth as well.
• Climate Change and Natural Disasters: Even as the world was reeling from the post-Covid impact on local, regional, and global economies, it was further shaken up by grave climate change-induced disasters in the form of hurricanes, cyclones and floods. The ‘State of the Global Climate 2021’^[4], published by the World Meteorological Organization, reported loss and damages worth USD 100 billion in 2021. In 2022, the floods in neighbouring Pakistan devastated the country’s economy^[5] – with total damages at USD 15 billion, total economic losses at USD 15.2 billion, and the cost of rehabilitation and reconstruction at USD 16.3 billion, Over 33 million people were affected and almost 9 million were pushed below the poverty line. India also witnessed more frequent extreme weather events, as storms and flooding alone cost the country over USD 7.5 billion in 2021. Once the loss and damage from weather events in agriculture and other sectors are quantified, the figure will be much larger.

This year’s budget is historic for two major reasons: first, it seeks to lay the foundation for the next 25 years to ensure continuity and stability in development decisions and, second, it divides policy priorities into seven interdependent, yet holistic ‘saptarishis’ (seven sages). Together, they make the budget people- and development-friendly. They are:

1. Inclusive Development:

Equal benefit to all sections of society through investments in agriculture and farmers’ welfare, as well as medical infrastructure.

• Agriculture (BE 2023-24 = Rs 1,25,036 crore or a 5% increase over last FY RE): The proposed additions under the Budget will cater to the entire agricultural supply chain. Enhanced agriculture credit to the tune of Rs 20 lakh crore for animal husbandry, dairy, and fisheries aims to improve the quality and care of farm resources. The proposed Digital Public Infrastructure will revolutionise agricultural practices in India by providing open-source access to solutions, inputs, credit, and insurance to farmers. Decentralised storage capacity for farmers will help them realise competitive prices, and additional cooperative dairy and fishery societies will further organise the sector and bring in more formal agricultural employment. Finally, in line with the Atma Nirbhar Bharat vision of the Hon’ble Prime Minister, the Agriculture Accelerator Fund will reach young entrepreneurs in rural areas and give them an opportunity to innovate and revolutionise agricultural practices.
• Health (BE 2023-24 = Rs 89,155 crore or a 12% increase over last FY RE): Post the Covid-19 pandemic, the focus of the health sector has shifted to infrastructure development. The Budget speech announced the establishment of 157 new nursing colleges, introducing multidisciplinary courses at medical colleges on technology, allowing private players to access the Indian Council for Medical Research (ICMR) facilities, and pushing R&D in the pharmaceutical sector. In addition, health infrastructure via the old and new All India Institute for Medical Sciences (AIIMS) has received an increased outlay, and additional expenditure under Ayushman Bharat shall further the mission of achieving universal healthcare.

2. Reaching the Last Mile:

To ensure inclusivity of tribal groups, the Budget lays special emphasis on schemes for their benefit, specifically through the new Pradhan Mantri PVTG (particularly vulnerable tribal groups) Development Mission, and by increasing the number of teachers in the Eklavya Residential Model Schools for tribal children in remote areas. Education has received a significant boost this year of 8.3% as compared to last year.

3. Unleashing the Potential:

Micro, Small and Medium Enterprises (MSMEs) form a core part of the Indian economy. India has over 63 million MSMEs, contributing 30% to its GDP, 40% to its manufacturing output, and 48% to its exports. One of the biggest challenges of the sector has been the provision of safe credit opportunities. The Standing Committee on Finance^[6], in our ‘Strengthening Credit Flows to the MSME Sector’, had noted that more than 60% of the MSMEs currently avail credit from informal sources, depending on costly and unreliable credit. The Budget provides additional support to MSMEs through the infusion of Rs 9000 crore under the revamped Credit Guarantee Scheme. This will potentially lower the cost of capital and allow MSMEs to avail collateral-free credit guarantee of Rs 2 lakh crore. Access to reliable credit will significantly boost their output, accelerate formalisation, and increase creditworthiness.

Additionally, the Standing Committee also recommended bringing MSMEs into the digital ecosystem both for credit access and formalisation, especially given India’s UPI success story. The Government further establishes an enterprise DigiLocker for MSMEs, other businesses and trusts as a one-stop solution for foundational identification and digital safe-keeping of documents.

4. Youth Power:

With a strong belief in the power of the youth and their ability to take our nation forward through the Amrit Kaal, the Budget aims to enhance the layout for skilling. The PM Kaushal Vikas Yojana 4.0 (PMKVY 4.0) will focus on technical skills like robotics, artificial intelligence, and coding to provide a stimulus to India’s already booming start-up industry. Previous editions of PMKVY have provided over 10 million certifications, out of which a quarter have materialised into meaningful employment. The increased outlay for school and higher education, coupled with the National Education Policy, will provide an impetus to infrastructure-oriented, multidisciplinary, and skill-based education. The power of India’s youth will be unleashed by providing them with high-quality modern education with a special focus on skill development and entrepreneurship.

5. Green Growth:

The Hon’ble Prime Minister’s commitment to net zero by 2070 at COP26 laid the foundation for India’s green growth. With the announcement of the target, India also committed to utilising renewable power for 50% of its energy requirements, reaching 500 GW of non-fossil energy capacity by 2030, reducing the total projected carbon emissions by one billion tonnes by 2030, and reducing the carbon intensity of the economy by 45% by 2030. The announcement came at a crucial juncture for the world, as the United Nations Environment Programme^[7] projects a 2.8 degrees Celsius rise in temperature by the end of the century, as opposed to the target of capping it at 2.0 degrees Celsius by 2100. It is estimated that by 2070, over 75% of greenhouse gas (GHG) emissions will come from countries from the Global South (developing countries).

India is one of the few Global South countries that has declared a net zero target for itself. The 2023-24 Budget takes this vision forward with Rs 35,000 crore allocated for capital investments into the green transition and net zero. Additionally, support shall be provided to set up battery storage systems with a capacity of 4000 MWh. The Green Credit Programme, along with the additional outlay to the National Green Hydrogen Mission, will provide further momentum to the green transition in India. The Government is also planning to introduce an Emissions Trading System unique to India, based on buying and selling of credits earned from reducing emissions intensity, as opposed to absolute emissions reductions.

At COP26, the Hon. Prime Minister announced a requirement of $1 trillion from developed countries for climate finance.^[8] India’s Budget proves that it is on track to achieve its Nationally Determined Contribution (NDCs) and achieve net zero, which shall also require mobilisation of finance from the developed world, in line with the principle of common but differentiated responsibilities (CBDR).

6. Infrastructure Investment:

The last nine years have been extremely positive for India’s infrastructure story. For example, the Government doubled the number of airports to 146, added close to 43,000 kilometres to the national highways, and tripled the capital expenditure on higher education institutions like AIIMS and IITs. The budget streamlines the investment pipeline for the country across sectors. Firstly, it simplifies the administrative structure for investments. It creates an Infrastructure Finance Secretariat for more private investment in public-dominated sectors like urban infrastructure, power, and others. It creates a ‘Harmonised Master List of Infrastructure’, with recommendations from experts on classification and financing requirements for the Amrit Kaal.

Secondly, the Budget lays great emphasis on city and urban planning through the ‘Sustainable Cities of Tomorrow’ mission, focusing on resource efficiency and enhanced availability and affordability. It creates the foundation for significant investment opportunities in urban infrastructure through the introduction of municipal bonds. Urban investments also get a renewed push through the Urban Infrastructure Development Fund worth Rs 10,000 crores.

Lastly, regional connectivity, railways, and logistics have been given a boost via enhanced allocation of Rs 2.4 lakh crore to the railways.

7. Financial Sector:

To reduce the cost of compliance, regulators shall be expected to review regulations through public and private consultation. Further, in order to enhance the governance of public sector banks, the Government shall propose amendments to the Banking Regulation Act, the Reserve Bank of India Act, and the Banking Companies Act. Additionally, the focus will be on setting up better digital infrastructure for payment security by using PAN as the common identifier on platforms and providing subsidies to banks on UPI payments.

Conclusion

In summary, the Amrit Kaal Budget is a visionary, well-balanced budget as it provides fresh stimulus through two key measures. Firstly, enhanced capital expenditure (capex) to boost employment, help crowd in private investments, and improve operational efficiency. This year, capex has been increased to Rs 10 lakh crore (3.3% of GDP), and effective capital expenditure, inclusive of grants-in-aid to states, to Rs 13.7 lakh crore (4.5% of GDP). Secondly, a significant middle-class tax cut to put money in the hands of consumers, generate demand, as well as increase spending and consumption. Together, both sources of stimuli will stabilise macroeconomic parameters, increase growth rate to 6-7%, and make India a shining star in the global economy by driving digitisation and decarbonisation.

Author Brief Bio: Jayant Sinha is the Chairman of the Standing Committee on Finance in Parliament and a Lok Sabha MP from Hazaribagh, Jharkhand. Views are personal.

Reference:

^[1] https://www.un.org/development/desa/dpad/publication/world-economic-situation-and-prospects-february-2023-briefing-no-169/#:~:text=Average%20GDP%20growth%20is%20projected,weigh%20on%20investment%20and%20exports.

^[2]https://openknowledge.worldbank.org/bitstream/handle/10986/38030/GEP-January-2023.pdf?sequence=34&isAllowed=ypage 25

^[3]https://openknowledge.worldbank.org/bitstream/handle/10986/38030/GEP-January-2023.pdf?sequence=34&isAllowed=ypage 11

^[4]https://library.wmo.int/doc_num.php?explnum_id=11178

^[5]https://www.worldbank.org/en/news/press-release/2022/10/28/pakistan-flood-damages-and-economic-losses-over-usd-30-billion-and-reconstruction-needs-over-usd-16-billion-new-assessme

^[6] https://eparlib.nic.in/bitstream/123456789/994373/1/17_Finance_46.pdf

^[7] https://www.unep.org/resources/emissions-gap-report-2022

^[8] https://pib.gov.in/PressReleasePage.aspx?PRID=1768712

Introduction

The Union Budget, which is an annual report on the government’s revenue and expenditure, is often perceived as a platform for major policy announcements. However, it actually accounts for a decreasing share of public expenditure, with much more spending happening at the state level. As a result, State Budgets deserve more attention and scrutiny. The hype around the Union Budget stems from a bygone era when taxes changed frequently, and people were eager to know how prices would be affected. However, stability and predictability are essential for tax reform. While there may be a need to simplify the GST and reduce the number of tax rates, this is the responsibility of the GST Council, not the Union Budget.

The current budget is a stark contrast to N.D. Tiwari’s “sindoor budget” of 1988-89 made headlines for its symbolic tax exemptions on items like sindoor and kajal. Instead, this budget is all about empowering women, youth and progress. The government is gearing up for the ‘Amritkaal’, charting a path towards a developed India by 2047. It’s a budget focused on real change and investment in the future, leaving the quaint symbols of the past behind. This is a budget for a new India, ready to embrace its destiny and unleash its full potential.

The Finance Minister encountered a nuanced predicament in navigating the current economic terrain. Mindful of the importance of upholding macroeconomic stability, the budget strikes a delicate equilibrium between tackling inflationary constraints and promoting economic growth hindered by external factors. This conundrum entailed a precarious balancing act, which necessitated the Finance Minister to display unwavering composure.

The art of budgeting is a crucial component in fulfilling the commitment to proficient and impactful governance. Substantial deviations in the projection of revenue and expenses can impede the execution of government initiatives and policies, ultimately jeopardising social welfare results. Against this background, we highlight four areas where the budget has done exceptionally well.

Fiscal Discipline

Democratic political systems often face choices between present and future welfare. According to Nordhaus’ influential work published in 1975 on the political business cycle, a democracy that evaluates political parties solely based on their past performance is likely to make decisions that are unfair to future generations. This is because politicians may prioritise short-term gains over long-term benefits in order to secure immediate political success. Nordhaus (1975) further goes on to say, “within an incumbent’s term in office, there is a predictable pattern of policy, starting with relative austerity in early years and ending with the potlatch right before elections” (pp.187)^[1].

Hence, the political business cycle theories posit that incumbent political parties engage in opportunistic behaviour, manipulating economic instruments before elections to enhance their chances of being re-elected. In other words, Governments are known to employ a strategic approach by exploiting the short-term Phillips curve to further their objectives^[2]. In addition, governments may also take advantage of the limited knowledge and simplistic expectations of voters in order to attain their goals. This reveals a complex interplay between political manipulation and the economic implications of short-term policies.

At the same time, the work of Rogoff (1990) and Rogoff and Sibert (1988) suggests that in situations where information about the competence of an incumbent is limited, expansionary policy measures implemented prior to an election are often viewed as an indicator of high competence^[3]&[4]. As per their analysis, a potential outcome of the political business cycle could be an increase in the budget deficit, as well as an increase in the money supply via the monetisation of the deficit. In addition, there may also be an increase in inflation during the electoral period, as politicians prioritise short-term economic gains in order to increase their chances of re-election. In the case of India, too, some studies have found clear evidence of an increase in revenue deficit in the years leading to an election^[5].

However, under the incumbent government in India, things have changed. What Narendra Modi’s government is doing is completely opposite to the basic tenets of the political business cycle theories. The Prime Minister has proved Nordhaus and other PBC theorists wrong.

With the upcoming elections, many expected the government to unleash a spree of spending, showering voters with loan waivers and other financial goodies. But the Finance Minister and the government have taken a different approach, choosing to prioritise long-term stability over short-term gains. By resisting the temptation to indulge in vote-winning measures, the government has demonstrated a commitment to responsible financial management, even in the face of political pressure. This budget stands as a testament to the government’s determination to put the country’s future first.

The government has demonstrated exceptional fiscal discipline in recent years, consistently meeting or exceeding its deficit target. India’s fiscal deficit shot up to a record 9.3% in 2020/21, from 4.6% the previous year due to pandemic-related spending. This year, despite formidable fiscal challenges owing to the ongoing Russia-Ukraine conflict and global economic uncertainties, the government deserves accolades for reinforcing its resolve to stick to the fiscal deficit target of 6.4%.

For the next year, the government has committed to bringing down the fiscal deficit to 5.9%. This reduction is in line with the government’s earlier commitment towards the fiscal deficit target of 4.5% of GDP by the end of 2025/26. Obviously, this doesn’t have to be linear. Even if the reduction is by 0.5% next, there may be more opportunities for substantial consolidation and growth as the global recession and headwinds would be behind us in the first year of the next government. Thus, there will be more room for fiscal consolidation in the next two years.

The endeavour to simultaneously achieve rapid economic growth and social welfare improvement while maintaining responsible fiscal management is a multifaceted challenge. Nevertheless, recent studies indicate that the fundamental means of accomplishing these goals is not merely through the reduction of fiscal deficits but rather by diminishing expenditures of inferior quality. This necessitates abstaining from the temptation to artificially generate capital account surpluses that come at the cost of enlarging gross fiscal deficits.

Capital Expenditure

In the midst of the Great Depression in 1933, economist John Maynard Keynes penned a passionate letter^[6] to President Roosevelt urging him to take bold actions to jumpstart the economy. Keynes argued that the government should borrow money and use it to increase spending rather than raise taxes, as a way to boost national purchasing power and ignite growth. While it’s unclear if Roosevelt actually read the letter, he did ultimately turn to government spending to revitalise the economy through his New Deal.

A lot has already been written about the union government setting aside ₹ 10 lakh crore (~3.3% of the country’s GDP) for Capital Expenditure in this budget, a 37.4% increase from last year’s Revised Estimates. Economists talk about the multiplier effect. The multiplier effect is a concept that highlights the exponential impact of changes in government spending on a nation’s output. When the fiscal multiplier is greater than one, an increase in government spending leads to a corresponding increase in output that is greater than the original investment. In simpler terms, a single rupee increase in government spending could result in a return that is worth much more than one rupee.

The economic survey may have shed light on the resurgence of private investment, but with global challenges and monetary constraints, it alone may not be enough to drive growth. This is where the government steps in, with their unwavering commitment to revive the economy demonstrated by allocating a record-high ₹ 10 trillion for long-term capital expenditure in 2023-2024, surpassing the previous year’s budget of ₹ 7.5 trillion, thus providing a cushion from global headwinds. A 33% increase year-on-year shows that the government is putting their money where its mouth is and that growth is within reach. This, in turn, will also help in crowding in private investments.

But what is the extent of the fiscal multiplier in the case of capital expenditure in India? There is a dearth of studies on the subject. However, the most influential study out of these is that by Bose & Bhanumurthy, which first came out as a NIPFP Working Paper in 2013 and later got published in the Journal of Applied Economic Research^[7]. According to their calculations, the multipliers for capital expenditures, transfer payments, and other revenue expenditures are 2.45, 0.98, and 0.99, respectively. However, the multipliers for taxes are approximately -1. Goyal & Sharma (2018) find that capital expenditure exhibits the greatest cumulative multiplier, with a size ranging from 2.4 to 6.5 times that of revenue expenditure.

Furthermore, capital expenditure has a more pronounced impact on long-term inflation reduction. Nonetheless, capital expenditure is susceptible to greater volatility due to its vulnerability to discretionary spending cuts^[8]. However, the multipliers of public capital expenditure would not be as high as they used to be in 2013. The explanation for this phenomenon is straightforward. During the past nine years, the government has made significant expenditures on infrastructure development, including roads, railways and logistics. Infrastructure no longer poses as significant an obstacle for private capital influx as it did during the UPA era. Thus, the government is not just focusing on capital expenditure but also on addressing institutional weaknesses.

At the same time, the capital expenditure multipliers of the states are much higher the that of the union government’s capital expenditure. Thus, it is crucial to encourage states to prioritise capital expenditure as a means to revitalise the economy, especially after the shocks^[9].

Incentivising States for Capital Expenditure

In pursuit of fostering cooperative fiscal federalism, the Union Government has extended a program of financial assistance program for capital expenditure for the upcoming fiscal year of 2023-24. This initiative has received a significant boost in allocation, with an increased budget of 1.30 lakh crore, representing a 30% escalation from the previous year. In terms of the current fiscal year, this amounts to approximately 0.4% of the nation’s GDP. The importance of empowering the states to undertake capital projects cannot be overstated, and this expanded allocation represents a progressive step forward.

The FM has decided to continue a 50-year interest-free loan to the state governments for one year. The states have been given autonomy to spend this at their discretion, with a catch – a portion of it is contingent upon increasing their actual capital expenditure. But what will they spend it on? The Union Government has tied parts of the outlay to either reforms or allocation to priority areas. This includes urban planning reforms, financing reforms in ULBs to make them creditworthy, the State share of capital expenditure of central schemes etc. Thus, there will be an inherent incentive for the state governments to also ensure the quality of public expenditure.

However, states should focus on the quality of the capital expenditure. There is a significant variation in capital expenditure by different states. Delving into the granular details, the states of Uttar Pradesh, Maharashtra, Madhya Pradesh, Karnataka, and Tamil Nadu collectively contribute over 40% towards the consolidated capital outlay carried out by all states. In a particularly fascinating trend, states such as Uttar Pradesh, Odisha, Assam and Jharkhand exhibit a relatively larger proportion of capital outlays in relation to the size of their respective economies.^[10]

Similarly, the RBI’s State Finances report has also pointed out that fiscal marksmanship relating to capital outlay also varies across the state. During 2017-18 to 2019-20, states & union territories like Andhra Pradesh, Delhi, Jammu & Kashmir, Goa, Tripura and Punjab have cut their budgeted capital expenditure by more than 40%. Himachal Pradesh, Haryana, and Nagaland were the sole outliers in exceeding their budgeted targets for capital expenditure.

The RBI report has also flagged the issue of a residual approach to spending. Over the past five years, a substantial portion, amounting to one-fourth, of total expenditures occurred solely during the month of March. This presents a grave matter as the primary objective of spending by the year’s end results in a compromise in the quality of expenditures. The Union budget can only nudge the states to improve their quality of public expenditure. But under a federal structure, states will have to do more if they want to ensure higher growth rates for a prolonged period.

Transparency

In the past two budgets, the government has taken bold steps to bring off-budget borrowings, like those of the Food Corporation of India (FCI) previously, in its own light. By doing so, they aim to offer a clear picture of the government’s financial obligations, enabling informed decisions and assessments.  Previous finance ministers acknowledged the issue with off-budget borrowings and made hollow announcements which were never fructified. P. Chidambaram, in his budget speech (2008-09), stated – “I acknowledge that significant liabilities of the government on account of oil, food and fertilizer bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent. There is a need to bring these liabilities into our fiscal accounting.” However, it was Nirmala Sitharaman who made it a reality. The finance minister has continued with this tradition again this year.

Social Sector

Some have argued that the union government’s outlay on the social sector, as a percentage of its overall expenditure, has displayed a persistent stasis. In FY 2009-10, the government allocated 21% of its total expenditure towards social sector expenditures, which subsequently saw a slight decrease to 20% by FY 2019-20. Over the past fourteen years, the average proportion of social sector spending by the government, amounting to nearly one-third (30%), was dedicated to the provision of subsidised food to the country’s poorest two-thirds. However, the percentage of such spending exceeded 50% in FY 2020-21 amidst the global health crisis caused by the COVID-19 pandemic.

While the percentage of overall expenditure on the social sector would have remained same in the last few years, there is an incremental improvement on quality of expenditure in the social sector. Notably, today, intended beneficiaries get 100% of funds which they are supposed to get. During a visit to the drought-stricken Kalahandi district in Odisha in 1985, Rajiv Gandhi made a statement indicating that only 15 paise out of every rupee spent by the government actually reached the intended recipient. One should quote Justice A. K. Sikri’s majority opinion on the constitutionality of the Aadhar Act: “Resultantly, lots of ghosts and duplicate beneficiaries are able to take undue and impermissible benefits… It cannot be doubted that with UID/Aadhaar much of the malaise in this field can be taken care of.”^[11]

The digital public infrastructure has not only enhanced accessibility of public services to the most disadvantaged and susceptible sections of the nation, but it has also facilitated the detection and elimination of fraudulent beneficiaries from various government schemes. The system has effectively curbed leaks caused by non-existent and duplicate beneficiaries who use fake identities to obtain benefits. While one should acknowledge that there are some exclusion errors, but the government is ensuring that there are enough safeguards against exclusion in the cases of authentication failure. The digital public infrastructure and Aadhaar based biometric authentication (ABBA) also makes it easier to ensure portability of benefits.

More importantly, use of Aadhaar to identify and authenticate beneficiaries in government scheme has led to considerable fiscal savings. Thus, even if the social sector spending has remained stagnant, the use of DPI and ABBA, has ensured that more people, especially the one who are marginalised and vulnerable are able to get intended benefits.

Moreover, criticism has been raised regarding the allocation of funds for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) scheme in the 2023-24 budget. The budget for MGNREGA in 2023 is 18% lower than the budget estimates of Rs. 73,000 crore for the current year of 2022-23, and approximately 33% lower than the revised estimates of Rs. 89,000 crore for the current year.

MGNREGA operates on a demand-driven model where households seeking employment are entitled to a minimum of 100 days of unskilled manual labor during a given financial year. In the ongoing fiscal year of 2022-23, nearly all rural households, or 99.81%, have been offered wage employment according to their demand. If a job seeker does not receive employment within 15 days of application, they are eligible for a daily unemployment allowance as per the provisions of the Scheme.

As there is reduced demand of MGNREGA, the number of person days generated by MGNREGA has also been going down. While the person days generated under MGNREGA was 389.09 crore in FY20-21 due to the migration to rural areas owing to pandemic, it has been going down subsequently.

	FY2022-2023	FY 2021-22	FY2020-21	FY 2019-20
Person days generated (in crores)	248.08	363.33	389.09	265.35

Source: Ministry of Rural Development^[12]

It should also be highlighted that the budget estimates are revised once there is more demand for work under MGNREGA. Over the past seven years, actual funds released to states under MGNREGA have consistently exceeded budget estimates. For example, in the fiscal year 2019-20, the budget estimate for MGNREGA was Rs.60,000 crore, but due to increased demand, it was revised to Rs.71,001 crore. Similarly, the COVID-19 pandemic and the sudden influx of population into rural areas led to a revised estimate of Rs.1,11,500 crore in 2020-21, compared to the original budget estimate of Rs.61,500 crore. In the fiscal year 2021-22, the budget estimate of Rs.73,000 crore was revised to Rs.98,000 crore. These figures demonstrate that the government is willing to allocate additional funds to MGNREGA in response to demand.

Source: Ministry of Rural Development

Conclusion

The Union Budget is no longer the sole platform for major policy announcements, as much more spending happens at the state level. The hype surrounding the budget is a remnant of a bygone era, and stability and predictability are essential for tax reform. The current budget is focused on empowering women, youth, and progress, leaving symbolic tax exemptions of the past behind. The Finance Minister has done an exceptional job of balancing tackling inflationary constraints and promoting economic growth. The government’s commitment to responsible financial management is commendable, even in the face of political pressure, and this budget stands as a testament to putting the country’s future first. The government has demonstrated exceptional fiscal discipline in recent years and deserves accolades for reinforcing its resolve to stick to the fiscal deficit target of 6.4%. The endeavour to simultaneously achieve rapid economic growth and social welfare improvement while maintaining responsible fiscal management is a long-term goal that requires prudent budgeting, and this budget is a step in the right direction.

Author Brief Bio:  Bibek Debroy is the Chairman, Economic Advisory Council to the Prime Minister & Aditya Sinha is Additional Private Secretary (Policy & Research), Economic Advisory Council to the Prime Minister.

References:

^[1] Nordhaus, W. D. (1975). The Political Business Cycle. The Review of Economic Studies, 42(2), 169-190.

^[2] Dubois, E. (2016). Political Business Cycles 40 Years after Nordhaus. Public Choice, 166(1-2), 235-259.

^[3] Rogoff, K. (1990). Equilibrium Political Budget Cycles. The American Economic Review, 80(1), 21-36.

^[4] Rogoff, K., & Sibert, A. (1988). Elections and Macroeconomic Policy Cycles. The Review of Economic Studies,, 55(1), 1-16.

^[5] Sen, K., & Vaidya, R. R. (1996). Political Budget Cycles in India. Economic and Political Weekly, 31(30), 2023-2027.

^[6] Keynes, J. M. (1933). An Open Letter to President Roosevelt. Retrieved from University of Texas: https://bit.ly/3ScJVa2

^[7] Bose, S., & Bhanumurthy, N. R. (2015). Fiscal Multipliers for India. The Journal of Applied Economic Research, 9(4), 379–401.

^[8] Goyal, A., & Sharma, B. (2018). Government Expenditure in India: Composition and Multipliers. Journal of Quantitative Economics volume, 16, 47-85.

^[9] Swaroop, E. (2022). Estimation of Expenditure Multiplier for India. Retrieved from IES: https://bit.ly/3YSly44

^[10] RBI. (2023). State Finances: A Study of Budgets of 2022-23. Mumbai: Reserve Bank of India.

^[11] Justice K S Puttaswamy (Retd.) and Another versus Union of India and others, 494 of 2012 (Supreme Court of India September 26, 2018). https://bit.ly/3XNTsph

^[12] Ministry of Rural Development. (2023, February 3). Clarifications of Union Rural Development Ministry on budget cut to MGNREGA. Retrieved from Press Information Bureau: https://bit.ly/3SdCmzP

The global economy has been experiencing severe economic downturns since 2008. Much before the sub-prime crisis triggered the collapse of global trade, the world economy started experiencing recessionary trends. The European debt crises, the US-China war, the Covid-19 pandemic, and the Russian-Ukraine war, among others, have significantly influenced the world economic outlook in the last decade. Amid such a crises prone period, even though the growth of trade has also been sluggish, the world trading platform has experienced a structural transformation creating several new opportunities for emerging and developing market economies. More than ever, international trade and commerce are now considered as critical weapons to ensure world peace and harmony, as these escalate the cost of future conflicts. This ideology though is not new. Mill (1848) also emphasised how international trade renders inter-country wars obsolete by enhancing their interdependences. However, today, the definition of trade has changed drastically. Unlike the traditional concept where production processes used to happen domestically and countries were engaged in the export and import of only final goods and services, in today’s world, there is no product which is made in a single country. The new trade reality is now demonstrated by the so-called Global Value Chains [or, GVCs], which are guided by fragmented production structures spread across different countries in the world. For example, as explained in a recent study by Xing and Huang (2021), a smartphone finally assembled in China contains components from several countries, such as visual design and power management module from the USA, computer codes from France, printed circuit board from Taiwan, silicon chips from Singapore, memory chips from Korea, and precious metals from Bolivia.^[1] Another example is that of a Boeing 787 Dreamliner (originally an American product), the fragmented value chain of which, is shown in Figure 1 below.

Figure 1: GVC of a Boeing 787 Dreamliner Aircraft

Source: Adapted from <https://modernairliners.com/>

Thus, Figure 1 clearly demonstrates how in the new world of highly complex international production chains, goods cross several borders multiple times before reaching their end customers. To put it another way, this suggests that what we see happening in the world today isn’t really trade in final goods or services, but rather trade in intermediate inputs, materials, components, activities, or tasks. Rapid technological development, a steady decline in tariffs, lower costs for shipping and logistics, organisational innovations, etc. are just a few of the factors that remarkably decreased the cost of coordination between nations and enabled this process of global production sharing. The upper panel of Figure 2, based on OECD’S TIVA database, shows how, in the past few decades, this type of trade has dominated global exports and imports, and today, contributes to more than 60 per cent of the world trade.

Figure 2: Gross Trade in (Final and Intermediate) Goods and Services, 1998 – 2018

Source: OECD TIVA (2021 Ed.); Authors’ Calculations.

In addition, it is crucial to understand that the network of trade is expanding not between countries or industries but rather between businesses/firms, the majority of which are overseas affiliates or subsidiaries of various multinational corporations (i.e., the carriers of Foreign Direct Investment).^[2] This is what is referred to as intra-firm trade in the literature, which is distinct from international trade carried out between unrelated parties. In a recent interaction with Financial Express, Pant and Bimal (2020) noted that

“Estimates suggest that about a third of global trade occurs in the form of intra-firm trade among MNEs;^[3] the remaining two-thirds occur either as exports by MNEs to non-affiliates or trade among non-MNE national firms.”

In fact, the value of these intra-firm trade flows has increased as a result of MNCs’ expanding operations and rapidly emerging GVCs in the past decade or so. Based on the OECD’s database on Activities of Multinational Enterprises [AMNE], it has been estimated that these companies contribute to approximately 36 per cent of the global output, which accounts for about two-thirds of the world exports and more than 50 per cent of world imports. The UNCTAD [United Nations Conference on Trade and Development] estimates also suggest that around 80 per cent of global trade takes place under the purview of MNCs. However, this type of trade occurs only when MNs make investments abroad, referred to as Foreign Direct Investment [or, FDI]. Thus, in today’s GVC-driven era, FDI is serving as a conduit for the growth of trade flows. The main argument is that, in the present-day world, it is impossible to examine trade policy in isolation or to disentangle it from FDI policies.

To discuss the linkages between international trade and FDI, let us first understand the definition of Foreign Direct Investment, and how it differs from Foreign Portfolio Investments (FPI) or what we call Foreign Institutional Investors (FII) in India.

Until about the early 1960s, FDI, like other forms of international investment used to be considered as a part of international capital theory. It was actually seen as a response to interest rate differentials between countries around the globe. Thus, it was recognised that, similar to trade in goods, a capital-scarce country (the one which offers higher return) imports capital and this continues up to the point where the return to capital gets equalised internationally. This explanation is analogous to the predictions of the standard Heckscher-Ohlin (H-O) theory of trade.^[4] Hence, it was thought that trade in goods could substitute for the international movement of factors of production, including FDI. But, with the failure of this capital theory in explaining most of the rise in international production (in contrast to just capital movement) during the late 1950s, efforts were made to analyse them from the trade theorist’s point of view. Only then, it was realised that trade and FDI are actually two different sides of the same coin (Pant and Srivastava 2015) and hence, they cannot be studied or analysed in isolation.

It was John Dunning who, in his 1980 seminal work, defined foreign direct investment based on what is popularly referred to as the ‘OLI’ paradigm, where O stands for Ownership, L for Location, and I stands for Internalisation. According to him, these three are potential sources of advantage that underlie a firm’s decision to become a multinational corporation. The first component ‘O’ addresses the question that why some firms go abroad, and suggests that a successful MNC has some firm-specific advantages, which allow it to overcome the costs of operating in a foreign country. Location advantages, on the other hand, deal with the question of where an MNC chooses to locate and suggest why it sometimes becomes profitable for a firm to locate itself in different countries, rather than producing and exporting from its parent country. Lastly, internalisation advantages influence how a firm chooses to operate in a foreign country, trading off the savings in transactions, hold-up and monitoring costs of a wholly-owned subsidiary, against the advantages of other entry modes such as exports, licensing, or joint venture. This implies that Foreign Direct Investment, as distinct from FPI or FII, does not just include the transfer of foreign capital from an enterprise in the source to another related entity in the host country, but also the transfer of know-how in the form of advanced technology, managerial expertise, or any other firm-specific factor.^[5] Put differently, FDI combines three elements, viz. trade in commodities, services (for example, managerial services) and international technology flows. Secondly, most direct tax treaties between nations provide favourable treatment in the withholding tax rates applied on dividends/royalty payments among related enterprises, acknowledging the relationship between FDI flows and the production capacities of firms (Pant 2014).

In fact, as explained in Pant and Srivastava (2015), an investor in the parent country decides to switch to domestic production in the other country (i.e., it opts for FDI), when either entry barriers like tariffs make its exports uncompetitive, the other location gives it access to critical inputs at comparatively lower costs (vis-à-vis, the parent country), or when such a move becomes necessary to internalise the firm-specific advantages. With the establishment of the World Trade Organisation [WTO], the world has already experienced a gradual decline in tariff rates imposed by different countries. Hence, as argued in Huria and Pant (op. cit.), it is the latter reason that presently explains the expansion in the flows of FDI. This is because even if trade is free but FDI flows are restricted, it will be difficult for an economy to deepen its integration with the world market via GVCs. For one, restrictions on FDI inhibit the flow of technology and hence, the country’s technology-based trade. Secondly, no or lower levels of integration with global value chains (due to restrictions on intra-firm trade) may limit trade in intermediate inputs, which, in turn, could render a nation less competitive in the manufacture of a good (or goods) in which it had previously enjoyed a comparative advantage. Nevertheless, it is equally important to recognise that this association between FDI and trade could be complex and vary across countries, industries, production stages, and types of investment, etc. For example, while liberalised trade and FDI policies may foster a favourable correlation between the two, higher regulatory interventions in an industry in the form of tariff or non-tariff barriers, tax-based subsidies, etc. could potentially offer substantial incentives to the MNC to replace trade with FDI.

Tables 1 and 2 encapsulate Pearson’s pairwise correlation coefficients (measuring the strength and direction of the linear relationship) between different FDI and trade indicators (at the aggregate and sectoral level) for the world economy.

Table 1: Pearson’s Pairwise Correlation Coefficients – Trade and FDI, World (1970-2021)

Percentage Shares in GDP	Total Exports	Total Imports	Total Trade
Net FDI Inflows	0.714*	0.731*	0.821*
Net FDI Outflows	0.654*	0.676*	0.780*
Total FDI Flows	0.701*	0.719*	0.817*

 

Source: World Bank’s World Development Indicators (WDI) Database; Authors’ calculations. Note: * represents significance at 1 per cent level, Total trade represents the total of goods and services trade, Green highlights represent the top three correlations. Interestingly, all the correlations are above 50 per cent, and the majority of the correlations are above 70 per cent (i.e., closer to perfect correlation).

Table 2: Pearson’s Pairwise Correlation Coefficients – Goods, Services Trade and FDI, World (1970-2021)

Percentage Shares in GDP	Goods Exports	Goods Imports	Goods Trade	Services Exports	Services Imports	Services Trade
Net FDI Inflows	0.717*	0.745*	0.721*	0.729*	0.662*	0.704*
Net FDI Outflows	0.665*	0.699*	0.669*	0.660*	0.581*	0.635*
Total FDI Flows	0.707*	0.736*	0.711*	0.711*	0.638*	0.686*

 

Source: WDI; Authors’ calculations. Note: * represents significance at 1 per cent level, Green highlights represent the top three correlations.

At the aggregate level for the world economy, Table 1 shows that trade and FDI are significantly and positively correlated with each other – be it the association between inward FDI and exports/imports, or the outward FDI or total FDI with exports/imports. Further, Table 2 replicates the analysis by incorporating information separately, on goods and services trade. Once again, we find that there exists a direct positive association between the two, indicating their complementarity. Though our analysis is indicative, it clearly makes a strong case for examining trade and FDI policies in a comprehensive and coherent framework.^[6]

But, is this link well established in India’s trade and FDI-related policies? – Below we discuss some of the evidence in this regard, and suggest a possible way forward.

The Case of India

The lower panel of Figure 2 and Tables A.1, A.2 in the appendix to this article, show that India’s trade composition and the trade-FDI link are in line with our observations for the global economy. In fact, the correlation coefficients, on average, are higher in the case of India, than in the world, indicating the strength of the positive association between international trade and foreign direct investment. The last decade has witnessed several initiatives on the part of the country’s government to improve the ease of doing business, and make the country one of the most attractive FDI destinations in the world. In 2011, the Department for Promotion of Industry and Internal Trade (erstwhile Department of Industrial Policy and Promotion [DIPP]) introduced the National Manufacturing Policy [NMP] to increase the share of the manufacturing sector in India’s GDP. National Investment and Manufacturing Zones have been established as an instrument to implement NMP, with an overall objective to facilitate the access to a requisite ecosystem for promoting world-class manufacturing activity (Press Information Bureau [PIB] 2018).

In September 2014, the government launched the Make In India [MII] programme with an endeavour to create and encourage domestic and multinational firms to develop, design, manufacture, and assemble products in India (PIB 2022b). As an initiative to simplify the process of approvals of inward FDI flows under government approval, the Union Cabinet abolished the Foreign Investment Promotion Board [FIPB] in May 2017. Henceforth, all the FDI proposals are required to be submitted through the DPIIT-managed Foreign Investment Facilitation [FIF] Portal, and respective applications are then screened by the concerned administrative ministries/department (PIB 2022a). Further, the government has also opened up several sectors for which FDI up to 100 per cent is permitted through the automatic route. A few examples are – ports and shipping, railway infrastructure, renewable energy, agriculture and animal husbandry, automobiles and auto components, single-brand product retail trading, and insurance intermediaries, among others.

While several other policy initiatives have also been undertaken to position India as the most attractive location for investment and conducting businesses (such as the Production Linked Incentive Schemes, PM Gati Shakti, India Industrial Landbank, the National Logistics Policy, Remission of Duties and Taxes on Exported Products, and the National Single Window System), however, at the same time, the country’s trade policy has been found to be highly restrictive in nature in the past one decade. Figure 3, based on the Global Trade Alert Database, shows the share of harmful trade interventions defined as those that restrict trade practices, as a percentage of total trade interventions for India for the period 2009-2022.

Figure 3: Harmful Interventions (% of total trade interventions), India (2009-2022)

Source: Global Trade Alert Database; Authors’ Calculations.

Except for the year 2011, as shown in Figure 3, the number of harmful trade interventions has always exceeded the number of liberalised trade interventions by the country. In fact, very recently, India was also flagged as highly restrictive in its trade practices by the industry associations of the United States of America, who pointed out that “although Prime Minister Narendra Modi has taken steps aimed at improving India’s business environment, India’s high tariff rates and restrictive border measures continue to limit manufacturers’ ability to invest in and export to India.”^[7] This is a concern in itself as trade and FDI go hand in hand, and the rapidly expanding international production networks have only strengthened their association in the recent past.

The recent Budget announcements, however, seem to take a positive step in this direction. While the country’s long-due Foreign Trade Policy is still in the making, in this year’s Union Budget 2023-24, the country’s finance minister has reduced custom duties on a selected set of intermediate inputs to enhance domestic value addition, promote export competitiveness, and correct duty inversion. This is in contrast to the Union Budget 2021-22, where duties on imports of inputs were raised to ensure higher value addition within the country (even though the majority of India’s imports are of the intermediate category (see Figure 2, Lower panel)). Examples include some components used in TV manufacturing, electric heat coils, capital equipment for electrically operated vehicles and lithium battery production, parts of mobile phones, denatured ethyl alcohol for manufacturing of industrial chemicals, lab-grown diamonds, etc. Certain tariffs have been raised though for competing imports that may impact the local industry, such as rubber, toys and parts of toys.^[8] Other initiatives include skill training programmes, the development of data processing centres, etc.

Despite these initiatives, one issue that still remains pertains to the bureaucratic separation of trade and FDI in India. While the definitional aspects of FDI are looked after by the country’s Ministry of Finance, the policies and control of FDI is with DPIIT. On the contrary, India’s international trade and trade-related policy matters are governed by the relevant trade policy division in the commerce ministry. More so, no chapter in its Foreign Trade Policy (FTP 2015-2020) thus far deals with investment-related provisions/norms (except for the section on Special Economic Zones/Export Oriented Units). This demands immediate attention especially when today, trade is determined more by technology and FDI, than by access to cheaper and abundant factors of production, and the emerging dynamics make it imperative for India to become a part of international production networks. The latter, as discussed above, are guided by MNCs to a great extent. The recent restructuring in the department of commerce may take this into account and create a separate wing to deal with trade and FDI policies simultaneously. Similarly, the government should consider the trade-FDI interlinkages while drafting India’s new FTP.

Lastly, akin to India’s policy framework, even at the multilateral level, there is no such comprehensive agreement that guides the trade in goods-services-investment nexus. However, acknowledging the link between the three, it seems that countries around the world are trying to bridge this gap by signing more and more regional trade agreements – now that these agreements also contain a specific chapter on investment-related provisions.^[9] On the contrary, in India, the majority of the trade agreements still focus only on trade liberalisation, and exclude substantive provisions for foreign direct investment. Our recent work shows that this will not create significant gains for India, especially when it is now willing to conclude such deals with countries which are amongst its top FDI source economies.

Author Brief Bio: Prof. Manoj Pant is former Director/VC of IIFT and Sugandha Huria is a faculty member, IIFT.

References

Batra, R. N. (1973). Studies in the pure theory of international trade. Springer.

Dunning, J. H. (1980). Toward an eclectic theory of international production: Some empirical tests. Journal of international business studies, 11(1), 9-31.

Gereffi, G., & Lee, J. (2012). Why the world suddenly cares about global supply chains. Journal of supply chain management, 48(3), 24-32.

GOI. (2021). Union Budget 2021-2022: Speech of Nirmala Sitharaman. New Delhi: Government of India.  Retrieved from <https://www.indiabudget.gov.in/doc/bspeech/bs202122.pdf>

GOI. (2023). Union Budget 2023-2024: Speech of Nirmala Sitharaman. New Delhi: Government of India.  Retrieved from <https://www.indiabudget.gov.in/>

Huria, S., & Pant, M. (2018). Foreign direct investment, welfare and wage inequality in a small open economy: theory and empirics. Indian Economic Review, 53, 131-166.

Huria, S., & Pant, M. (2019). Trade, Investment, and the Multilateral Trading System. In 20 Years of G20 (pp. 93-111). Springer, Singapore.

Krugman, P., Obstfeld, M., & Melitz, M. (2017). International Economics: Theory and Policy. Pearson Education.

Mill, J. S. (1848). Principles of political economy with some of their applications to social philosophy. 1857. George Routledge and Sons, Manchester, 467-474.

Mishra, A.R. (2022, November 27). US industry associations red-flag India’s ‘restrictive’ trade barriers. Business Standard. Retrieved from <https://www.business-standard.com/article/economy-policy/us-industry-associations-raise-concern-over-india-s-trade-measures-122112700668_1.html>

Pant, M. (2014, June 16). FDI or trade: end the confusion. The Mint. Retrieved from <https://www.livemint.com/Opinion/d35M6kulhSuMF4H5Bamc3N/FDI-or-trade-end-the-confusion.html>

Pant, M., & Bimal, S. (2020, May 28). Combating economic downturn post Covid-19 pandemic: Sync trade and FDI policies. Financial Express. Retrieved from <https://www.financialexpress.com/opinion/combating-economic-downturn-post-covid-19-pandemic-sync-trade-and-fdi-policies/1972883/>

Pant, M., & Srivastava, D. (2015). FDI in India: history, policy and the Asian perspective, New Delhi: Orient BlackSwan.

Press Information Bureau (2018, December 27). Establishment of NIMZs. Retrieved from <https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1557424>

Press Information Bureau (2022a, May 24). Foreign Investment Facilitation Portal (FIF) completes 5 years since Union Cabinet decision to abolish FIPB. Retrieved from <https://pib.gov.in/PressReleasePage.aspx?PRID=1827889>

Press Information Bureau (2022b, December 16). Make in India facilitates investment, fosters innovation, helps build best in class infrastructure. Retrieved from <https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1884260#:~:text=’Make%20in%20India’%20is%20an,manufacturing%2C%20design%2C%20and%20innovation.>

Xing, Y., & Huang, S. (2021). Value captured by China in the smartphone GVC–A tale of three smartphone handsets. Structural Change and Economic Dynamics, 58, 256-266.

[Data] Global Trade Alert Database: https://www.globaltradealert.org/

[Data] OECD Activities of Multinational Enterprises Database: https://www.oecd.org/sti/ind/amne.htm

[Data] OECD Trade In Value Added Database: https://www.oecd.org/sti/ind/measuring-trade-in-value-added.htm

[Data] World Bank’s World Development Indicators Database: https://databank.worldbank.org/source/world-development-indicators

[Website] Organisation for Economic Co-operation and Development <https://www.oecd.org/>

Appendix

Table A.1: Pearson’s Pairwise Correlation Coefficients – Trade and FDI, India (1970-2021)

Percentage Shares in GDP	Total Exports	Total Imports	Total Trade
Net FDI Inflows	0.898*	0.883*	0.892*
Net FDI Outflows	0.721*	0.733*	0.745*
Total FDI Flows	0.876*	0.867*	0.876*

 

Source: WDI; Authors’ calculations. Note: * represents significance at 1 per cent level, Green shaded cells represent correlation above 0.8.

Table A.2: Pearson’s Pairwise Correlation Coefficients – Goods, Services Trade and FDI, India (1970-2021)

Percentage Shares in GDP	Goods Exports	Goods Imports	Goods Trade	Services Exports	Services Imports	Services Trade
Net FDI Inflows	0.863*	0.867*	0.871*	0.916*	0.800*	0.903*
Net FDI Outflows	0.686*	0.705*	0.703*	0.741*	0.711*	0.755*
Total FDI Flows	0.840*	0.849*	0.851*	0.895*	0.799*	0.888*

 

Source: WDI; Authors’ calculations. Note: * represents significance at 1 per cent level, Pink highlights represent the top three correlations while green and pink shaded cells together represent correlation above 0.8.

^[1] The Organisation for Economic Co-operation and Development [OECD] has also demonstrated several such cases with the help of it Trade In Value Added [TIVA] Database.

^[2] Gereffi and Lee (2012)

^[3] Multinational Enterprises (MNEs) and Multinational Companies (MNCs) are used synonymously in the trade-FDI literature.

^[4] In a 2-country, 2-sector, 2-factor world, Hecksher-Ohlin Theorem states that a country should export the good which utilises its abundant factor of production intensively, and import the commodity which is intensive in the use of its scarce factor of production. For example, if the world market comprises of only India and the United States of America, with India having comparatively higher access to labour relative to that of Capital, while the US is relatively richly endowed with capital, then as per the H-O theory, India should export the labour-intensive good (say, textiles) to the USA. On the contrary, the USA should export machinery (i.e., the capital-intensive good) to India (See any textbook on trade theory such as Krugman, Obstfeld, and Melitz (2017) or Batra (1973) for details).

^[5] Huria and Pant (2018)

^[6] The literature now consists of a plethora of empirical studies examining the link between trade and FDI at various levels of analyses. For a detailed review, refer to Pant and Srivastava (op. cit.).

^[7] Mishra (2022)

^[8] Government of India [GOI] Budget Speech (2021, 2023)

^[9] Huria and Pant (op. cit.)

The FY 24 Union Budget, formulated amidst global headwinds and a bleak economic outlook in much of the developed world also had the conflicting domestic demands of growth and fiscal consolidation as challenges. With India ranking amongst the top 5 global economies, the Union Budget was awaited with bated breath not only by India, but by several friendly nations. The Hon’ble Finance Minister did not disappoint, with the vast majority of Indians at home and abroad, cheering a path breaking set of announcements!

While the economic growth in FY 23 is estimated to be at 7%, FY 24 growth is expected to range between 6 and 6.8%, in stark contrast to other large economies. This while continuing the downward trend of fiscal deficit from 6.4% of GDP in FY 23 to a targeted 5.9% in FY 24, and a target of 4.5% fiscal deficit by FY 25 – a challenging ask by any yardstick.

The FY24 Budget aims to propel economic growth via a record capital outlay of Rs 10 lakh crore, and rekindle animal spirits in the private sector, with the thrust areas being infrastructure development and green energy while keeping an eye on food security for the world’s largest population, and indirectly providing an impetus to manufacturing activity associated with these sectors.

Construction and Manufacturing being the largest employment generators, this budget lays the foundation for a developed and modern economy, catalyse job creation and aid demand generation, especially in rural and semi-urban clusters. The increased demand for skilled labour, would bring into sharp focus the various skilling initiatives kick-started in previous years and supported by the corporate sector.

India’s manufacturing sector of which MSMEs are the back-bone, has often been characterised by low returns on investment due to the high cost of logistics, high energy costs, low productivity, high working capital requirements coupled by meagre credit facilities, multiple labour laws, under- utilisation of capacity, and the absence of entire industrial eco-systems such as semi-conductor manufacturing, the last aspect resulting in supply chain vulnerability in testing times.

The Government’s relentless push to lower the cost of logistics and connect Tier 2 towns via construction of expressways, freight corridors, the Gati Shakti programme and the National Logistics Policy carries its unmistakable stamp on the FY 24 budget too, via a capex outlay of Rs 75,000 crore towards 100 critical projects including airports and Rs 2.4 lakh crores for Railways.

The PLI scheme launched two years ago including in areas such as mobile manufacturing, along with the very large scale of digital financial transactions via UPI, resulted in a large demand being created for smartphones, which are now manufactured in the country. An eco-system of semi-conductor manufacturing thus received due impetus, with large investments already committed.

Ease of Doing Business also received due focus, with a reduction in the number of compliances and de-criminalisation of several offences, and the PAN card being notified as the single identifier for businesses in FY24 budget. This should be of relief to firms with input tax credits in one state being able to offset tax dues in another state, as private sector working capital is presently blocked on this count. Green initiatives in the Power sector received a capex outlay of Rs 19,700 crore towards the Green Hydrogen Mission, with an additional Rs 35,000 crore being earmarked for transition to green energy and a further Rs 20,700 crore to connect renewable energy from Ladakh via a 13 GW transmission line. In addition to a significant reduction in carbon footprint with a target of net zero by 2070, large scale generation of renewable energy would help in lowering the cost of industrial power as well, to aid competitiveness in manufacturing.

The private sector has been making significant investments in defence manufacturing facilities and in R&D over the last few years. The sector received a further thrust over the last two years with the notification of four positive lists for indigenisation to substitute imports. While defence exports did make their presence felt in recent times with a stellar performance, the Hon’ble Prime Minister’s target to the sector of USD 5 billion in defence exports by 2025 at the recently concluded Aero India event, has far reaching implications for growth and transformation of the defence sector.

The budget features a capex outlay of Rs 1,62,600 crore for defence manufacturing in FY24—a 7% increase over the previous fiscal. Although a higher increase in the Defence capex would have been desirable, for now much shorter evaluation and ordering cycles and superlative execution are clearly the need of the hour, in light of both domestic imperatives and the exports target. The private sector defence industry which is now beginning to take the lead in order generation and execution, does require certain measures by way of enabling policies; hopefully they will be heard once again.

The Space sector has also been churning out a spectacular performance and has received a budgetary allocation of Rs 12, 543.91 crore, for FY 24, up 19% from the previous fiscal, including a capital outlay of Rs 6356.8 crore for space research for the forthcoming year, bringing cheer to the Space start-up and research eco-system.

The Space economy will be a game changer in times to come for the nation, by way of enhanced connectivity via 5G with the remote regions, ushering in a wave of education, financial inclusion, tele-medicine, tourism opportunities as more locations are discovered by both domestic and foreign tourists, growth and development – all key enablers to Ek Bharat Shrestha Bharat!

An examination of how key parameters in the attached table published by CII (with data sourced from CSO, RBI, Ministry of Commerce & Industry and CGA) have moved since 2018, will reveal the rationale behind many of the recent initiatives undertaken by the present Government. While per capita income has been steadily rising, inflation held in check, a rising trend in current account balance as a percentage of GDP underscores the urgent need to further enhance manufacturing activity and exports from India, as opposed to outright imports.

In order to increase exports especially in high tech areas, cost competitiveness and quality would be of paramount importance. Since a large part of the cost of the product is built into the design itself, once again, Indian industry’s famed frugal engineering skills—amply demonstrated by the Auto, Defence and Space sectors, would once again come into play! Adoption of industry 4.0 practices in manufacturing has already met with success at several plants in the country and the numbers are only expected to grow.

With execution being key, the Budget indirectly also places the onus onto laggard States to get their act together in dramatically improving on ease of doing business parameters and in creating a business-friendly environment in order to attract serious investors. With several steps now in place for a transition from a developing country to an emerging super-power, it’s all hands-on deck!

TABLE: KEY PARAMETERS OF THE ECONOMY

Sno	Category	Unit	2018-19	2019-20	2020-21	2021-22	2022-23
1	Population	Million	1327	1341	1355	1369	1383 (AE)
2	GDP & related indicators
2.1	GDP (2011-12 prices)	Rs Lakh Cr	140.0	145.2	135.6	147.4	157.6 (AE)
2.2	Growth Rate	%	6.5	3.7	-6.6	8.7	7.0 (AE)
2.3	GVA at Basic Prices (2011-12 prices)	Rs Lakh Cr	127.4	132.2	125.9	136.1	145.2 (AE)
2.4	Growth Rate	%	5.9	3.8	-4.8	8.1	6.7 (AE)
2.5	Gross Savings Rate	% of GNDI	30.6	29.4	27.8	N.A.	N.A.
2.6	Gross Capital Formation Rate	% of GDP	33.8	30.7	27.3	31.2	31.7 (AE)
2.7	Per Capita Net National Income (at Current Prices)	Rs.	1,25,883	1,32,115	1,26,855	1,50,007	1,70,620
3	Production
3.1	Food Grains	Million Tonnes	285.2	297.5	310.7	315.7	149.9 (AE)
3.2	Index of Industrial Production (Growth)	%	3.8	-0.8	-8.4	11.4	5.5 (Apr-Nov)
3.3	Electricity Generation (Growth)	%	5.2	0.9	-0.5	8.0	9.8 (Apr-Dec)
4	Prices
4.1	WPI Inflation (average)	%	4.3	1.7	1.3	12.8	11.6 (Apr-Dec)
4.2	CPI (Combined) inflation (average)	%	3.4	4.8	6.2	5.5	6.8 (Apr-Dec)
5	External Sector
5.1	Merchandise Export Growth	%	8.7	-5.1	-6.9	43.8	9.1 (Apr-Dec)
5.2	Merchandise Import Growth	%	10.4	-7.7	-16.9	55.1	25.0 (Apr -Dec)
5.3	Current Account Balance	% of GDP	-2.1	-0.9	0.9	-1.2	-3.3 (H1 FY23)
5.4	Foreign Exchange Reserves (end of year)	USD Bn	411.9	475.6	577.0	617.6	573.7 (as on 20 Jan 23)
5.5	Average Exchange Rate	Rs / USD	69.9	70.5	74.2	74.5	79.9 (Apr-Jan)
6	Money & Credit
6.1	Broad Money (M3) Growth (Annual)	%	10.5	8.9	12.2	8.7	9.7 (as on 13 Jan 23)
6.2	Scheduled Commercial Bank Credit Growth	%	13.2	6.1	5.6	9.6	16.5 (as on 13 Jan 23)
7	Fiscal Indicators (Centre)
7.1	Gross Fiscal Deficit	% of GDP	3.4	4.6	9.2	6.7	6.4 (RE)
7.2	Revenue Deficit	% of GDP	2.4	3.3	7.3	4.4	4.1 (RE)
7.3	Primary Deficit	% of GDP	0.4	1.6	5.7	3.3	3.0 (RE)

 

Source : as published by CII with data sourced from CSO, RBI, Ministry of Commerce & Industry and CGA

Legends : AE : Advance Estimates : RE : Revised Estimates; H1 refers to first half of fiscal year (Apr – Sep); NA indicates Not Available.

Smt Nirmala Sitharaman, the Hon’ble Finance Minister, presented her fifth successive Union Budget on 01 February 2023. By all accounts, it appears a growth-oriented budget and was hailed by eminent economists and captains of industry. No election freebies are visible in the budget in this pre-election year, which was a relief. The budgetary numbers at the macro level are summarised below.

GDP: The government has estimated a nominal GDP growth rate of 10.5% in 2023-24 (i.e. real growth plus inflation). The real GDP growth is estimated in the band of 6.1% to 6.8% with 6.5% as the base case.

Fiscal Deficit: The Fiscal Deficit is estimated to be 5.9% of GDP with the three year rolling target given as 4.5% of GDP (by 2025-26).

Expenditure: The government proposes to spend Rs 45,03,097 crore in 2023-24, which is an increase of 7.5% over the Revised Estimate (RE) of 2022-23.  Out of the total expenditure, Revenue Expenditure is estimated to be Rs 35,02,136 crore (1.2% increase) and Capital Expenditure is estimated to be Rs 10,00,961 crore (37.4% increase). Excluding loans and advances, the Capital Outlay has increased by 35% over the RE  2022-23.

Receipts: The receipts (other than borrowings) in 2023-24 are expected to be to the order of Rs 27,16,281 crore, an increase of 11.7% over RE of 2022-23.

Source : Note on Demand of Grants 2023-2024.

Defence Budget

Unlike previous budgets, the specifics of Defence Budget were conspicuous by their absence in the budget speech. There were no big-ticket announcements made. Allocations at the macro level are summarised below.

Total Allocation: Rs 5.94 lakh crore, an increase of 13% over Budget Estimate (BE) of previous year (Rs 5.25 lakh crore).

Capital Outlay: Increased by 6.7% to Rs 1.63 lakh crore. Distribution amongst the three Services is as follows:

Army:        Rs 37241 crore (increase of 14.25%)

Navy:                   Rs 52804 crore (increase of 10.64%)

Air Force:   Rs 57137 crore (increase of 6.3%)

DRDO:       Rs 23,264 crore (increase of 9%)

BRO:                   Rs 5000 Crore (increase of 35%)

iDEX & DTIS: Rs 116 Crore (increase of 93%) and Rs 45 Crore (increase of 95%).

Revenue Expenditure: An increase of 8.8% to Rs 2.7 lakh crore

Defence Pensions: Rs 1.38 lakh crore (increase of 15.5%).

MSMEs: Credit Guarantee Scheme with a corpus of Rs 9000 crore

MoD (Civil): Rs 8775 crore (Capital) and Rs 13838 crore (revenue)

Source : Note on Demand of Grants 19,20,21,22  for  2023-24

Comparison of Defence Budget with RE 2022-23

The present budget allocation of Rs 5.94 lakh crore, although 13% higher than BE 2022-23, yet it is just 1.5% higher as compared to the Revised Estimate (RE)  2022-23 of Rs 5.85 Crore (on an overall basis). This is evident from the interesting table below, which reveals that at the RE stage 2022-23, revenue budget had to be increased by more than Rs 26,000 crore, which as per the PIB release of 01.02.2023, was to ensure liquidation of the entire carry over liabilities during the current year thereby ensuring that there is no dent in the next year’s operational outlay of the Services. Clearly the major factors were the operational exigencies obtaining in Ladakh and North East as also the OROP arrears.

Defence Budget Composition (in Rs Crore)

Major Head	BE 2022-23	RE 2022-23	BE 2023-24	% Change 2022-23 RE to 2023-24 BE
MoD (Civil)*	43675	45183	45919	1.6%
Defence Services (Revenue)	239743	266984	277033	3.76%
Capital Outlay (Defence)	152369	150000	162600	8.4%
Defence Pensions	119696	153414	138205	-10% (15.4% BE FY 23

 

Extracted from Page 9 Serial 19-22, Demand For Grants 2023-24

*Excluding revenue receipts

As far as Pensions are concerned, there was a huge increase of about Rs 33,000 crore (28%) at the RE stage, which as per the PIB release included an amount of Rs 28,138 Crore to meet the requirement on account of revision of Armed Forces Pensioners/ Family Pensioners under One Rank One Pension (OROP). Thus, the BE 2023-24 reflects a decrease of about 10% in the Pension outlay vis a vis RE 2022-23.

Analysis of Overall Defence Budget

As outlined earlier, Defence Budget 2023-24 has an allocation of Rs 5.94 lakh crore including approximately Rs 1.38 lakh crore in pensions. There is a perception of Defence Budget being large and the need to cap it, especially the need for reducing the ever-burgeoning Pension bill. Every year sees an increased allocation to Defence; every year it is called the highest ever defence budget allocation. True, in terms of absolute figures but the whole gamut of figures associated with the defence budget need a nuanced scrutiny and ratio analysis with standard yardsticks along with their progression over the years to arrive at a meaningful inference. Accordingly, the official statistics for the last decade need to be examined under the following parts:-

• Growth Rate of Defence Budget Allocation
• Defence Expenditure as a ratio of GDP
• Defence Expenditure as a ratio of Central Govt Expenditure (CGE)
• Comparison with Major Countries/Countries of Interest

Budget of Ministry of Defence (in Rs Crore)

Source : Union Budget Documents 2010-2020; PRS.

The Defence Budget, as seen from the above figure, between Financial Years 2011 and 2021 has grown at a CAGR of 9%. During the same period, India’s GDP has grown from approximately USD 1676 billion to USD 2667 billion  (source IMF, Statista 2022). Adjusted for the USD-Rupee exchange rate (45.03 on 01.01 2011 and 73.05 on 01.01.2021), the GDP has grown at a CAGR of 9.94%, higher than the growth of Defence Budget, even when the defence budget includes expenditure on numerous civilian establishments like PSUs and ordnance factories with total strength of serving civilians being approximately four lakh.

Defence Expenditure as a Percentage of GDP (in Rs Crore)

Source:  Union Budget 2010-20, Central Statistics Office; PRS

The above Figure shows the Defence expenditure reducing as a % of GDP, a secular decline. To put things in perspective, throughout the decade of eighties, defence budget as a percentage of GDP was upwards of 3.5% while now the defence budget (including pensions) may barely exceed 2% of GDP. The inference is that while their is an annual increase in the Defence Budget, the same is declining in terms of percentage share as part of the GDP. If GDP is visualised as a piece of national cake, then defence is getting a smaller and smaller, ever reducing slice of this cake! A former Prime Minister had spoken of the necessity of maintaining the defence budget at 3% of GDP. The same was reiterated by the Standing Committee on Defence (2018) which had recommended that the Ministry of Defence should be allocated a fixed budget of about 3% of GDP to ensure adequate preparedness of the armed forces.^[i] As per official figures^[ii], the defence expenditure as a percentage of GDP has declined from 2.3% in 2012-13 to 2% in 2022-23. Just as a matter of reference, agricultural subsidies alone in India are usually about 2.25% of GDP, while distortions in power sector require another 4% of GDP.

As per the latest analysis, Defence expenditure has grown at an annual average rate of 8.6%, while total government expenditure has grown at 10.8%. The defence expenditure, thus, as a proportion of Central Government Expenditure, over the period 2012-13 to 2022-23 has decreased from 16.4% to 13.3%.  As per the BE of 2023-24, it is still lower at 13.18%

Defence Expenditure As a % of CGE (2012-13 to 2022-23) (in Rs Crore)

Sources:  Union Budget documents (various years); PRS.

As per the latest Stockholm International Peace Research Institute(SIPRI) report, India is the third largest military spender in the world. It will also be of interest to compare the defence spending of our neighbouring and developed countries, the budgets as a percentage of GDP and overall Govt expenditure. According to the data submitted by the Ministry of Defence to the Standing Parliamentary Committee on Defence, relevant to year 2018^[iii], the Defence Expenditure comparison is as follows:-

Country                          As % of GDP                                   As % of Govt Expdr

China                                        1.9                                                                 5.5

Pakistan                                     4                                                                   18.5

US                                             3.2                                                                 9

Russia                                      3.9                                                                 11.4

UK                                            1.8                                                                 4.6

It is evident that India’s Defence Expenditure as a % of GDP pales in comparison to expenditure of Pakistan, US and Russia. China’s defence budget as a % of GDP appears lower; However, as per the SIPRI report, India has a defence budget at USD 71.1 billion, while China’s defence budget is more than three times that of India at USD 261 billion.

Modernisation of Forces (Capital Expenditure)

It is evident that India can afford higher defence expenditure (from the perspective of GDP progression), yet the defence allocation is reducing in comparative terms vis a vis the overall Govt expenditure. Budget allocation to defence every year falls short of the resource projection by the Forces. For the current Financial Year 2023-24, out of the defence budget allocation of Rs 5.94 lakh crore, revenue expenditure on salaries, Operational Maintenance of Forces (stores, spares and repairs) along with pensions is Rs 4.08 lakh crore, which is 68.7% of the defence budget. Capital outlay of Rs 1,62600 crore forms just 27.4% of the defence budget.  The remaining allocation is towards border roads, research, and administrative expenses. It is the Capital outlay which is relevant for modernisation of Forces and a cause of concern as evident from the figure below^[iv].

Expenditure on Capital Outlay (2012-13 to 2022-23) (in Rs Crore)

Source: Union Budget documents (various years); PRS

It is evident that there is only a marginal increase in % share of Capital Outlay during last ten years. In fact, in absolute terms, between 2012-13 and 2018-19 the average annual growth rate of Capital Outlay was just 5% while between 2019-20 and 2022-23 it has increased to approximately 11%. The overall impact of a largely stagnant defence budget (adjusted for inflation) and within the budget, higher increase of revenue component (mainly pay and pensions) vis a vis Capital Outlay is that there is not enough capital allocation for modernisation of forces.

The Standing Committee on Defence (2018) had noted that modern armed forces should have one-third of its equipment in the vintage category, one-third in the current category, and one-third in the state-of-the-art category.  However, Indian Army had 68% of its equipment in the vintage category, 24% in the current category, and 8% in the state-of-the-art category. The Committee also noted that over the years, the Army has accumulated a substantial deficiency of weapons, stores and ammunition. It found that adequate attention has been lacking with respect to both policy and budget for modernising the aging armoury^[v].

Of late, the Govt has aptly prioritised Capital Expenditure at the national level as well as in Defence; the Capital outlay in national budget 2023-24 has increased by 35% over last year. However, the defence budget 2023-24 has only a modest increase of 8.4% in Capital outlay (vis a vis RE 2022-23), allocating Rs 1,62,600 crore vis a vis 1,50,000 crore at RE 2022-23, which itself was a reduction from BE figure of Rs 1,52,369 crore. The inference is that while Govt wants to alter the Capital to Revenue expenditure ratio in favour of Capital so that Forces are modernised at a faster pace, yet it has realised that after excluding committed and contractual liabilities, there are limitations in absorption of Capital allocated on an annual basis.

In order to tackle the limitations in annual absorption of allocated modernisation funds, the 15^th Finance Commission recommendation of constituting a non lapsable, dedicated Modernisation Fund for Defence and Internal Security has to be implemented. This will also be a reassurance for industry and encourage them to enhance their production capacities. It is also to be noted that higher Capital Expenditure as part of defence spending has a multiplier effect on industrial productivity and thus the national GDP, not to emphasise the strengthening of defensive capability itself. Overall, it gives a fillip to the Comprehensive National Power of which military strength is an important component.

Defence Pensions (Revenue Expenditure)

The next perception to be addressed is the inordinate burgeoning of the pension bill. As seen from the Figure on Defence Pensions, the same have increased at a CAGR of approx. 13.5%. This pension bill increase is again lower than the nominal GDP growth, despite grant of OROP and arrears during the period. However, there is no denying the fact that the defence pensions are increasing at a faster pace (13.5%) than the defence budget itself (9%), ie pace of increase is 50% higher.

If we take the 10 year window as 2012-13 to 2022-23, Expenditure on defence pension has grown at an annual average rate of 10.7%. This is again higher than the average annual growth of the defence budget at 8.6%. In the budget for 2023-24, the expenditure on defence pension is estimated to be Rs 1,38,205 crore which is 15.5% higher than the BE of Rs 1,19,696 crore in 2022-23. This is ostensibly due to payment of arrears of OROP, due since July 2019.

Expenditure on Defence Pensions (2010-11 to 2020-21) (in Rs Crore)^[vi]

Source:  Union Budget 2010-20; PRS.

Expenditure on Pensions as % of Defence Budget (in Rs Crore)

As far as the share of pension in the defence budget is concerned, it increased from 19% in 2012-13 to 26% in 2019-20.  It has since fallen to about 23% as per the budget estimates of 2023-24.  In the budget for 2023-24, the expenditure on defence pension is estimated to be Rs 1,38,205 crore which is 15.5% higher than the BE 2022-23 of Rs 1,19,696 crore, but 11% lower than the 2022-23 RE figure of Rs 1,53,414 crore. This is ostensibly due to payment of arrears of OROP, due since July 2019.  It is likely that there would be additional allocation at RE stage.

It is also worthwhile to mention that average per capita pension of defence personnel is much lower than a Central Govt civil employee. For 11,28,441 civilian pensioners, the Govt paid Rs 64,684.44 crore as pension in year 2021-22 while for 36,03,609 defence pensioners, the outgo was Rs 1,21,983.9 crores^[vii]. The Defence Pension Budget, however, is big in absolute numbers due to large number of retired personnel which itself is a function of soldiers being compulsorily retired early from 36 years age onwards owing to the requirement of maintaining a young and physically fit military. The total number of defence pensioners stands at 34,10,567 while the total number of all Govt pensioners is 68,62,465^[viii]. The inference is startling, ie today, half of the total Central Govt pensioners today are defence personnel and it only corroborates the analysis above. It also indicates that that India has 2.4 defence pensioners for every serving soldier while the ratio for civilians is approximately one pensioner for each serving employee.  The reason for high pension bill of the Services, is now evident; it is this problem which would have made a real dent in the pension bill, if tackled.

Various proposals have been made over the years to check the pension budget, ie lateral absorption in Govt jobs on retirement or re-calibration of retirement ages. However, they have not been implemented. Last year, in June 2022, the Agnipath scheme of recruitment of soldiers has been introduced. Although, reduction of pension budget was not been listed as one of the objectives of the Agnipath scheme in the Govt website, yet it is likely to result in reduction of revenue expenditure, depending upon the annual recruitment intake.

Revenue Expenditure (Excluding Pensions)

Revenue expenditure (excluding pensions) for the year 2023-24 as per the budget estimates is Rs 2.7 lakh crore, which is approximately 45.5% of the total defence outlay, a major chunk. It caters for salaries, operational maintenance of Forces, stores, spares and repair expenditure. Since the limelight at the national level is invariably on the requirement of speeding up defence modernisation and limiting the defence pensions, the less glamorous revenue component of defence expenditure does not get enough attention of analysts. In any case, salaries is a rather inelastic component of Revenue Expenditure, based on Central Govt Pay Commission awards, while the variable factor of Revenue Expenditure happens to be the Operational Maintenance of Forces.

The Revenue allocation of Rs 277033 crore for 2023-24 is a significant increase of 15.5% from BE 2022-23 (Rs 2,39,743 crore) but just a 3.8% increase from RE 2022-23 (Rs 266984 crore). This needs to be seen in the backdrop of salary budget which is expected to increase 6-8% annually due to inflation based DA increases alone. The inference is clear, either the Revenue allocation will have to be enhanced again at RE 2023-24 or there will be a severe squeeze on operational maintenance of Forces, including stores, spares and repairs.

Indigenisation and Atma Nirbhar Policy

Make In India initiative was launched on 25 Sep 2014 with the primary goal of     making India a global manufacturing hub by encouraging both domestic as well as foreign companies to manufacture their products within the country. Since then, Make In India has introduced many new initiatives viz promoting FDI, implementing IPR and developing the manufacturing sector, thereby facilitating job creation and fostering innovation and skill development. The major focus of Make In India in Defence Sector has been on Indigenisation in manufacturing of weapon systems and Govt’s commitment to transform India into a Defence Industrial Hub for both import substitution as well as to export Indian made defence products to other countries. During the recent Air Power Show in Bengaluru on 13.02.2023, the Hon’ble PM, Shri Narendra Modi stipulated the Export target of USD 5 billion for defence systems by 2025.

The Govt has taken a number of initiatives to promote indigenous manufacture of defence equipment. In 2017, a Make II – a time bound, fast track procedure – was introduced in Defence Acquisition Procedure to encourage private sector to design and manufacture prototype of equipment which meet the requirements/voids of defence and field them with the three Services. It is felt that a similar procedure for revenue acquisitions also needs to be introduced as part of Defence Procurement Manual; can be termed as a Make III procedure or any other suitable nomenclature. This will also give a huge fillip to the MSMEs, manufacturing assemblies/modules/spare parts for defence.

In September 2020, the Central Govt increased the limit for foreign direct investment (FDI) in defence sector from 49% to 74% under the automatic route^[ix]. FDI beyond 74% is permitted with government approval which may be given where FDI is likely to result in access to modern technology. Since the increase in limit, an FDI inflow of Rs 186 crore has been reported in the defence sector in the very next year^[x].

This year’s budget 2023-24 was silent on Indigenisation; last year, budget speech 2022-23, the Hon’ble Finance Minister had announced that 68% of defence procurement will henceforth be from indigenous manufacturers. Hon’ble Defence Minister has now stated in Bengaluru on 15 February that the Govt will earmark 75% of defence procurement budget for the domestic industry. The move will throw open Rs 1 lakh crore in defence contracts for Indian private and public sector defence companies in the new fiscal year^[xi]. However, for this to happen, the production capacity of domestic Industry (DPSUs and private Sector) has to increase significantly.

In order to deeply entrench the indigenisation drive of weapon systems/ equipment, the focus on R & D in defence also has to improve. In the last six years, the expenditure on R&D by DRDO, the primary research agency for defence, has remained between 0.08% to 0.09% of GDP. This is too low as noted by the Standing Committee on Defence (2021), much lower than what developed countries spend. The total national spend on R&D has to go up to at least 1% of GDP, for the success of indigenisation policy in defence. Innovation in the defence domain has to be given a further boost through start-ups eco system, IDEX and DTIS schemes and collaboration with academia.

Inferences

• Indian Defence spending, whether as a percentage of GDP or on pro rata basis is decreasing gradually and continuously.
• The spending is lower in comparison to most countries of interest, even though India has higher security concerns.
• Apparently, while security concerns get adequate attention, priority is development, ie infrastructure and poverty alleviation.
• However, there is evidence of commendable flexibility in additional funding of defence requirements at RE stage, based on operational requirements.
• Within the Defence Budget, focus is on modernisation and infrastructure; however, procedural constraints seem to hamper absorption of allocated funds. The recommendations of 15th Finance recommendation on non lapsable modernisation fund have to be implemented. It is also evident that Capital Outlay for procuring modern Weapon Systems/Platforms can increase significantly only if higher funds are allotted to defence, ie a higher % of GDP or Central Govt Expenditure.
• Pension Budget is large due to sheer number of retired personnel, even though per capita pension of defence personnel is lower than national average, despite OROP granted by the present Govt.
• Higher ab-initio allocation is required for operational maintenance of Forces to avoid adhoc additional funding at RE stage.
• Salary and Pension bills being rather inelastic (based on Central Pay Scales and norms), the funding squeeze will either be on Capital Expenditure or on Operational Maintenance of Forces.
• The initiatives on Indigenisation of Defence Manufacturing are a potent way to conserve Capital and need to gather further pace. Atma Nirbhar is the way to go, but will require increase in domestic production capacity and higher R&D expenditure.
• Overall, a way has to be found in the ensuing decade to reverse the decline in defence spending as a percentage of GDP, accelerate the modernisation of Forces and have higher defence contribution in Comprehensive National Power of India.

Author Brief Bio: Lt Gen Kapil Kumar Aggarwal, AVSM, SM, VSM retired as the Director General, Electronics and Mechanical Engineering. Earlier, he was the Chairman, Army Pay Commission Cell. He is a Post Graduate Engineer from IIT Kharagpur and also an alumnus of Defence Services Staff College, Wellington.

References:

^[i] 40th Report: Demands for Grants (2018-19) General Defence Budget

^[ii] https://prsindia.org/budgets/parliament/demand-for-grants-2022-23-analysis-defence#

^[iii] P13, Demand for Grants 2020-21, Standing Committee for Defence (2019-20)

^[iv] https://prsindia.org/budgets/parliament/demand-for-grants-2022-23-analysis-defence

^[v] 41st Report, Demands for Grants (2018-19) Army, Navy and Air Force, Standing Committee on Defence, Lok Sabha, March 2018, http://164.100.47.193/lsscommittee/Defence/16_Defence_41.pdf.

^[vi] https://prsindia.org/budgets/parliament/demand-for-grants-2022-23-analysis-defence

^[vii] Lok Sabha Unstarred Question No 2961 of 03.08.2022

^[viii] Lok Sabha Unstarred Question No 2324 of 16.03.2022

^[ix] “Press Note No. 4 (2020 Series), reviewing Foreign Direct Investment (FDI) Policy in Defence Sector”, Press Information Bureau, Ministry of Commerce & Industry, September 18, 2020.

^[x] Starred Question No. 161, Rajya Sabha, December 13, 2021, https://pqars.nic.in/annex/255/AS161.pdf.

^[xi] Economic Times, New Delhi, 16 February 2023