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While Budget 2021 trod the fine line between protection and growth, Budget 2022 is about forging ahead. Here’s how the revenue and expense sides of the Centre slice up, and how this is different from last year.

Revenues
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Revenues
Expenditure
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Expenditure

Risk Factors

What can send revenue projections awry?

On the revenue side, there are two positive factors heading into 2022-23. One, the gross domestic product (GDP) of India has recovered what it lost during the second wave of covid-19. Two, tax collections in 2021-22 are expected to exceed budget numbers. As of December 2021—the three-fourths point of the current financial year, or 75%—gross tax collections for 2021-22 amounted to 87% of the budgeted amount. There was outperformance seen in all heads. For 2022-23, the government is projecting a 10% in gross tax revenues.

For such tax performance to continue, ‘tax buoyancy’ has to continue to be greater than 1. Tax buoyancy is the ratio of tax revenue growth to nominal GDP growth. A ratio above 1 means that taxes under that head are growing faster than GDP. For 2021-22, all heads other than excise were expected to be above 1. But if any head slips below 1, as was the case actively in the years prior to 2021-22, tax collections could fall short (Chart 1).

Private consumption, which is basically consumption by individuals and accounts for around 55% of India's GDP, is projected to stay below the pre-pandemic number. If private consumption doesn’t pick up, a tax buoyancy above 1 may not sustain (Chart 2).

Chart 1 and 2
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Chart 1 and 2

What can derail planned expenses?

The Indian economy felt the impact of covid-19, with a complete shutdown of the economy for about two months in 2020-21. This was followed by a gradual withdrawal of restrictions. As a result, tax revenues were much lower than projected in 2020-21. At the same time, the government has had to spend more to counter adverse impacts of the covid-19 pandemic. Given the smaller revenue pool it had, it was left with no choice but to borrow more. Its borrowings as a share of GDP, which had been falling since 2008-09, are expected to shoot up from 50% of GDP in 2019-20 to 57% in 2021-22 (Chart 3).

Higher borrowings means higher interest payments. As it is, interest payments swallow up 50% of tax revenues, leaving that much less room for other government expenditure that has a greater imperative—for example, on social sectors or in creating new assets that yield future benefits (Chart 4).

At the same time, the Indian central bank is under pressure to increase interest rates to check rising prices in the economy. If the Reserve Bank of India decides to focus on managing inflation, the Centre will have to spend more to prop up the economy. In order to do so, without expanding revenues, it will have to borrow. This will further increase the country’s debt and interest payments.

Chart 3 and 4
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Chart 3 and 4
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