Budget 2022: Strong outlook, weak numbers

The Budget lacks direction in managing growth, inflation and fiscal consolidation in the long term. Can it facilitate ‘Amrut kaal’ vision and priorities?

The focus of Budget 2022-23, presented to Parliament on February 1, is to facilitate “the process of strong growth”. Accordingly, the Budget “seeks to lay the foundation and give a blueprint to steer the economy over the ‘Amrutkaal’ of the next 25 years – from India at 75 to India at 100”.

In this context, the three-fold vision which the Budget has enumerated is: (a) complementing the macroeconomic-level growth focus with a microeconomic-level all-inclusive welfare focus, (b) promoting digital economy and fintech, technology-enabled development, energy transition, and climate action, and (c) relying on a virtuous cycle starting from private investment with public capital investment helping to crowd-in private investment.

The Budget has mentioned that “Amrutkaal” is futuristic and inclusive and to give impetus to growth with four clear priorities, namely (a) the PM Gati Shakti, (b) inclusive development, (c) productivity enhancement and investment, sunrise opportunities, energy transition and climate action and (d) financing of investments.

It is pertinent to note that the vision and the priorities cited in the Budget are mostly in a longer-term perspective. We wonder how this could be addressed in the annual Budget, which has been under a rule-based fiscal policy (limits on borrowing by the government) since July 5, 2004. It is important, therefore, to delve into the extent to which budgetary expenditure could be enhanced to move the economy to higher growth, given the limitations to raising revenues. Accordingly, let us study the fiscal management of the government, which is the core function of the Budget.

Fiscal management deals with expenditure (both revenue or consumption and capital or asset-creating expenditure), receipts (tax, non-tax and disinvestment proceeds), and borrowings to finance the deficit of the government. During 2021-22, as per the April-November data, there was a rebound of revenues and expenditure was lower and we were expecting a lower fiscal deficit relative to GDP. But in the revised estimates, the fiscal deficit-to-GDP ratio became higher at 6.9%, compared to 6.8% in the 2021-22 Budget Estimates because of higher provision of expenditure This is attributed to the surge in socio-economic welfare expenditure due to successive pandemic waves during the year and also settlement of Air India’s dues. Thus, revenue growth has not really supported lower fiscal deficit as was expected.

Another important issue is disinvestment proceeds. Evidence suggests that the government had an ambitious disinvestment target but has not been able to realise the same. For example, Budget 2021-22 estimated an amount of Rs 1.75 lakh crore, but in the revised estimate it was reduced to Rs 78,000 crore.

Budget 2022-23 has made a provision of total expenditure relative to GDP at 15.3% -- revenue expenditure of 12.4% and capital expenditure of 2.9%. The receipts, which include tax receipts (7.5% of GDP), non-tax receipts (1.05%) and disinvestment proceeds and recovery of loans (0.31%) together accounted for 8.9%, thus leaving a deficit (fiscal deficit) of 6.4% of GDP.

Fiscal deficit at this level is more than double the level legislatively mandated under the Fiscal Responsibility and Budget Management (FRBM) Act. The higher fiscal deficit is contributed by higher revenue deficit at 3.3% of GDP. It may be mentioned that fiscal correction and consolidation (to limit the fiscal deficit to GDP ratio to 3%) efforts have been weak. As the Budget has mentioned, a 3% fiscal deficit will not be achieved even by 2025-26.

The above discussion suggests that in a democracy, there is a deficit bias as expenditure is welcome but not tax. This means higher borrowings.

Needless to say, borrowing to finance the fiscal deficit has adverse implications on the interest rate. Interest rate on government borrowing goes up with higher borrowing and makes the cost of the bank lending rate higher. The private sector is discouraged from borrowing from banks by the higher interest rate. Furthermore, as the interest rate increases, the private sector is discouraged to issue bonds. In the end, private investment and private consumption decline and ultimately economic growth suffers. This development contradicts the government claim that “FY2022-23 will see an unprecedented thrust on capex public spending which is crucial for economic growth and generation of productive employment”.

There are two crucial issues that need to be addressed in the context of the fiscal policy strategy of the government. One is resurfacing of inflation in advanced economies and in many emerging market economies. This trend will result in imported inflation in India, leading to higher input costs which will adversely impact growth.

The second issue is sustaining economic growth while adhering to a lower fiscal deficit. What is important in this context is higher tax collection, minimising tax exemptions, and broadening the tax base to achieve a higher tax to GDP ratio.

In Budget 2022-23, the gross tax revenue (GTR) has been estimated at 10.7% of GDP. This is inadequate to address the fiscal correction. It should go up to 11.5%at least even by a conservative estimate.

Another important issue is the amendment to the FRBM Act, which remains pending. The FRBM Act should be amended to include revenue deficit to GDP ratio at zero. The root of all fiscal malaise is borrowing for current consumption. This trend of a persisting higher revenue deficit should be arrested. The government should not and cannot live beyond its means. Inclusive growth is also critical. Lower inflation facilitates inclusive growth.

In the context of the constitutional mandate, state governments have more expenditure responsibility. An effective coordination between the Centre and the states is helpful. Similarly, the civic government, which is also called the third layer of government, should not suffer from a resource crunch as the provision of basic health, basic education and basic amenities are the responsibilities of municipalities.

The Budget lacks the direction of a longer-term perspective on managing growth, inflation and fiscal consolidation. This opens it up to the question as to how it could help facilitate its professed ‘Amrut kaal’ vision and priorities.

(The writer is a former central banker and a faculty member at SPJIMR. Views are personal) (Syndicate: The Billion Press)