4 min read.Updated: 02 Feb 2022, 01:34 AM ISTSachidanand Shukla
The strategy seems to be to use reforms and the fiscal space to improve flexibility
Listen to this article
The Union budget will aid growth and take India towards its aspirational goals even as the economic and social impact of covid has disrupted nearly all aspects of life. Real gross domestic product (GDP) growth is expected to top 9% for FY22, but there remains a key fault line in the economy in the form of widening inequality of all kinds, income, jobs, access to healthcare, and education. The budget has opted for consistency and stability while tending to growth. More importantly, it has been able to resist the temptations of populism, going after the super rich, or trying anything novel that could have rocked the boat.
There is a clear narrative of sticking to the supply-side push that the Centre has sworn by throughout its pandemic firefight. It is not just about the global inflation narrative and data points that have played a part in it. The strategy seems to be to use reforms and the fiscal space to improve flexibility and innovation and improving the resilience of the economy as enumerated by the Economic Survey. The budget has been consistent in giving capex a big push for the second successive year where the allocation is budgeted to rise to ₹7.5 trillion on top of a 34% year-on-year (y-o-y) jump last year. This will have a higher multiplier effect in terms of jobs and growth and at the same time help enhance capacity and efficiency in the economy via spending on hard (roads, rail, ports) and soft (health, education, digital) infrastructure. There is also consistency when it comes to the quality of spending. Revenue expenditure for FY23BE at ₹31.95 trillion is budgeted to be flat on a y-o-y basis (0.9% y-o-y). This line item constituted 84% in FY22RE at ₹31.7 trillion but is slated to decline to 81%. On the other hand, capex is likely to rise by 24.6% over the RE of ₹6.6 trillion in FY22. While spending is reduced across all the heads of subsidy, interest payments will continue to rise. Interest payments will account for about 41% of non-debt receipts as per budgeted estimates of FY23 up from 35% in FY20.
Another consistent and heartening part concerns the Centre-state tango on capex. The budget has sought to extend support to the states capex by allocating ₹1 trillion additional financial support for states over and above what is available to them. This will keep the Centre and state capex cycles in sync. The dissonance between the Centre and state cycles has been a major challenge in the past. While there is a marginal slippage of 10 basis points (bps) in the FY22 fiscal deficit at 6.9% of GDP, the budget has remained on the path of fiscal consolidation with the FY23 fiscal deficit at 6.4% of GDP and an intent of going all the way down to 4.5% by FY26.
As for the budget math, it projects a tax growth of 10.7% in FY23, which is 10 basis points (bps) less than the growth expected in FY22 according to revised estimates. The higher buoyancy is expected in direct taxes with a growth of 13.6% y-o-y in FY23. Indirect tax is expected to grow by 5.6% y-o-y in FY23 mainly because of recent fuel excise duties cuts. In terms of non-tax revenue, the Centre is budgeting a dividend of ₹700 billion from the Reserve Bank of India (RBI) and state-run banks. The government has slashed its divestment target for FY22 from ₹1.75 trillion to ₹780 billion and for FY23 it kept the target of ₹650 billion. However, the budget provides little clarity if the Life Insurance Corporation of India initial public offering (IPO) will be accounted for this year or next year. Even if the IPO is done this year, it is likely that the cash flow may get pushed to next year.
According to the glide path adopted by the Centre, fiscal deficit will likely keep falling as a percentage of GDP from 6.4 % in FY23, to 5 % in FY24, 4.5 % in FY25, and 4 % in FY26. Yet, as compared to the N.K. Singh Committee baseline, over the next four fiscal years. India will actually be spending an additional ₹29.3 trillion ( ₹10.2 trn in FY23, ₹7.2 trillion in FY24, ₹6.5 trillion in FY25, and ₹5.4 trillion in FY26) assuming nominal growth rate of 12.5% during the period. This is around ₹7.3 trillion more each year on an average over the next four years. Hopefully, the government will try to use this space judiciously and in a non-disruptive manner. Government spending has been rather erratic and lumpy in part because of the covid waves and that has impacted quarterly growth rates. If the latest covid wave recedes quickly, the huge government cash balance (in excess of ₹4 trillion) sitting with RBI can be put to use to accelerate growth in H1 of FY23.