Why the budget held back fiscal firepower
PremiumExplanations for its modest assumption of nominal growth in 2022-23 vary from real risks to tactical turns
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PremiumIn the great epic Mahabharata, the Pandavas decided to sink their roots in Indraprastha by constructing a magnificent palace, a house of illusions built by architect Maya. Cousin Duryodhana, invited to the house-warming ceremony, is repeatedly tricked by these illusions. What he thinks is water is fine marble, and later he falls into water believing it is marble.
What you see is not what you get in the Union budget for 2022-23 either. Chimera, subterfuge and carnival mirrors abound in the 2020-21 Economic Survey, finance minister Nirmala Sitharaman’s budget speech, and, finally, data in the supporting documents. All three seem at odds with each other, and yet work in unison. Think of the budget as a Trojan horse, to use another mythical simile, with its outward appearance masking reality inside. This budget has the customary grandstanding and grandiose claims; and, yet, data is strewn with red flags indicating trouble ahead. A government that’s usually predisposed towards magniloquence has this time combined its penchant for overstatement with an inexplicable dose of moderation. What gives?
Take growth estimates. The budget estimates India’s nominal gross domestic product (GDP) for 2022-23 to grow 11.1%, which is markedly low on ambition, especially when all official commentary seems to suggest that the economy is expected to grow gangbusters as normal economic activity resumes. When asked in an interview about the budget’s less-than-optimistic growth estimate, Sitharaman cited multiple exogenous risk factors, such as an unwinding of the US Federal Reserve’s accommodative monetary policy and high oil and metal prices in global markets.
Pivot to the Economic Survey. Overseen and partly authored by a stand-in economic advisor, it estimates that India’s real (nominal minus inflation) GDP will grow by 8-8.5%. This implies that the finance ministry, which authors both documents, expects inflation during 2022-23 to stay within a range of 3% to 3.5%. Juxtaposed against expected risks on the horizon, that seems odd.
One of this budget’s highlights is the extraordinary growth in gross taxes, 13.5% higher than expected at the beginning of 2021-22. Part of the reason is better corporate results, resulting in higher corporate tax collections, beating expectations by more than 16%. Even the goods and services tax (GST) outdid estimates by 7.15%.
But the needle has not moved on tax coverage. With higher-than-expected taxes this year, the tax-to-GDP ratio is now 10.84%. Numerous studies have shown that increasing this ratio is key to India’s sustainable growth aspirations over the long-term. And yet, the budget estimates that next year this ratio will move a shade lower to 10.7%. This offers yet another sign that the finance ministry expects growth might be muted. This new-found temperance is aided by conservative spending targets.
There could be four reasons why the government is holding back on firepower.
The first is an ideological belief in supply-side economics, over demand stimulation, for powering long-term economic growth. This includes lowering taxes for firms (already accomplished by 2020-21) and improving their business prospects; this, it is fervently hoped, will induce corporates to spend more on ramping up manufacturing and new projects, thus creating more employment opportunities and aiding in higher income generation. Private investment has remained stubbornly stagnant over the past five years and this budget’s increased outlay on capital expenditure is hoping to change that. On balance, while allocating scarce resources, the government has opted for capex rather than redistributive fiscal support.
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The second reason for Sitharaman’s current thrift might be the weapon of “supplementary demand for grants" in her possession. These are approvals sought from Parliament for expenditure in excess of what is approved in the budget. For example, she has already received approval for additional expenditure of ₹5.6 trillion in the current year through two supplementary demands raised on 17 August and 12 January. This is higher than the 2021-22 capital expenditure budget of ₹5.54 trillion. A third demand, to finance expenditure till 31 March, is already in the works. This obviates the need to lump all spending in the budget, which instead can be used as a platform for lofty claims and shows of fiscal rectitude.
The third reason may be a tactical shift. Reversing its strategy of making grand but undeliverable promises—such as doubling of farmer income by 2022 or making India a $5-trillion economy—India’s ruling party may have decided to instead under-promise and over-deliver. One indication is the huge increase in the government’s gross market borrowing plan, which doesn’t quite square with its tepid growth estimate. Two possibilities here: Either achieve higher growth, or eventually borrow less, by March 2023. Both scenarios allow for exultation later.
The final reason could be a strategic decision to keep gunpowder dry for general elections in 2024. There were expectations that this budget would be custom-made for polls in Uttar Pradesh and Punjab, especially after the prolonged confrontation with protesting farmers. However, instead of pushing for a higher food subsidy, or increasing the vaccination outlay (which has been reduced from ₹35,000 crore to only ₹5,000 crore despite the huge task ahead), the budget has pushed for capex, which will take some two years to start showing any results. But that would be just in time for the jumbo sweepstakes.
Rajrishi Singhal is a policy consultant, journalist and author. His Twitter handle is @rajrishisinghal.
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