Budget
A preview to the Union budget, in five charts
Summary
- In her fourth budget, Nirmala Sitharaman is likely to strive an optimal balance between protection and growth. Here are five things to watch in that exercise on 1 February
Two of the three Union Budgets presented by Finance Minister Nirmala Sitharaman so far have had a distinct backdrop behind them. The first came after a thumping electoral mandate that offered latitude to reform, and the third during a raging pandemic that shrank the scope of possibilities. When she presents her fourth budget, on 1 February, she will face a carry forward from last year and the continuing pandemic. Equally, the challenge will be to see how best the government can enable the next step on the path back to normalcy. In this paradigm, here are five things to watch for in her Budget speech this year:
1. Spending Boost
The last budget was presented during a severe revenue squeeze caused by the pandemic. For 2021-22, the Centre increased the total budget size by a measly 1%, against the average annual increase of 15% in the preceding four years. Going into 2022-23, the Centre’s finances are in better shape and the arc of the economy is bending up. For the Centre, that means more tax revenues—and, thus, more room to spend.
The key spend here is ‘capital expenditure’—or, new assets that have a multiplier effect in terms of spending, jobs and income. Every rupee of capital expenditure by the government adds ₹2.50 to the GDP, according to a 2014 study titled ‘Fiscal Multipliers for India’ by Sukanya Bose and N.R. Bhanumurthy of the National Institute of Public Finance and Policy. In 2021-22, while total expenditure inched up 2%, capital expenditure increased 26%. A strong increase on both counts will frame the 2022-23 budget well.
2. Tax Buoyancy
Still, the impact of government spending on growth is limited—only 10-15%. The balance 85-90% of growth comes from consumption by individuals, investment by enterprises and foreign trade. If they are doing well, they lift tax collections, which account for about 80% of government’s revenue receipts. As of November 2021, with eight months elapsed in the current financial year, total tax collections were on course to exceed budget estimates (BE). Of the six major tax heads, four were exceeding 66% of BE.
This budget will indicate whether the government expects this momentum to sustain. In this context, the key metric is tax buoyancy—the year-on-year change in tax collections divided by GDP growth. A value above 1 is desirable, as it indicates the tax head is growing faster than growth. For 2022-23, the International Monetary Fund has projected India to grow at 8.5%. How the government expects these tax heads to grow will be revealed in this budget.
3. Welfare Path
Due to covid-19, three expenditure heads oriented around the welfare of specific interest groups saw a jump. These are allocations made towards provision of additional foodgrains to about 814 million existing beneficiaries under the National Food Security Act, distress employment in rural areas, and an income transfer of ₹6,000 per year to 120 million small and marginal farmers. In 2020-21, the total budgeted increase towards the three expenditure heads amounted to 2.6 times of 2019-20 levels.
While the second and third heads predate covid-19, they acquired greater urgency during the pandemic. Being open-ended commitments, both are expected to continue. But as the ripple economic effects of the pandemic subside, the provision of additional foodgrains could be gradually withdrawn. At present, this additional monthly commitment of 5 kg of foodgrains and 1 kg pulses per person is till March 2022. How much the Centre allocates under this head in this budget will signal its intent for 2022-23.
4. Disinvestment Markup
In terms of distance between intent and delivery, disinvestment was a big disappointment in 2021-22. Of the ₹1.75 trillion estimated from the sale of stakes in government companies in 2021-22, only ₹12,030 crore has materialized so far. The rest is being carried forward. The stated philosophy of this government is privatization of public sector enterprises, and its own business presence restricted to a handful of sectors of strategic import.
Since 2016, the Centre has given in-principle approval for disinvestment of 35 government enterprises or some part of them. Eight of these have been completed so far and another 20 are under process. As it carries forward the backlog from 2021-22, this budget will shed light on whether the government will aim to only complete what is pending, or be more ambitious and look to press more sales in 2022-23.
5. Deficit Management
One inevitability the government faces is that no matter how much revenue it mobilises, it will always fall short. The question is how much it is prepared to borrow, and that also determines how much it is prepared to spend. That difference between revenues and expenses is the fiscal deficit. Before the pandemic struck, the government was working towards bringing this measure of fiscal profligacy down to 3.5% of GDP in 2020-21. But as the pandemic slashed revenues and expenses spiralled, the fiscal deficit soared to 9.5% that year—the highest ever.
The government projected 6.8% for 2021-22, while committing to reaching 4.5% by 2025-26. It is nursing an economy back to life, for which it needs to spend on welfare and asset creation. That limits the space on the spending side. It will now reveal how much it plans to do this year as it tries to balance protection and growth.
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