Boosting growth, but fiscal consolidation path is weak
Coming out of the economic impact of Covid-19, budget expectations were manifold. One was to achieve reasonable growth in 2022-23 and the second was to push the economy onto a higher growth path in subsequent years.
The budget contains many action points that will serve to meet these objectives. The main theme of the budget is to increase capital spending, especially in the area of infrastructure. This should promote the growth process both for the current year and for the following years. All this must be done within a prudent budgetary framework. There is an attempt to reduce the budget deficit. But the roadmap for fiscal consolidation is unclear.
Growth in 2022-23
An estimate of the expected growth rate is essential for budgeting. The Economic Survey indicated a growth rate of 8-8.5% in 2022-23. Even though the investigation indicated some of the assumptions, it is still unclear how this estimate was arrived at. In the second half of 2021-22, when there were no base effects, the real GDP growth rate was only 5.6%. From there, going to 8-8.5% seems unrealistic. Maybe the growth rate can move into the region of 7 to 7.5 percent.
For budgetary calculations, however, the key parameter is the nominal growth rate. The budget adopted a nominal growth rate of 11.1%, which implies very low inflation. A more realistic assumption for the budget would have been a nominal GDP growth rate of 13%.
Gross tax revenue is projected to increase in 2022-23 by 9.6% over revised 2021-22 estimates and 24.4% over budget estimates. This against a backdrop of a nominal growth rate of 11.1 percent. Calculating buoyancy gets a bit tricky with the projection of a low nominal growth rate. Buoyancy is as low as 0.87.
As far as direct taxes are concerned, the structure remains broadly the same. The one-year extension of the start date of manufacturing or production under the preferential tax regime is appropriate. The structure of indirect taxation also remains largely unchanged. The use of higher tariffs to “protect” domestic industries is a step in the wrong direction. It gives a bad smell to the slogan ‘Make in India’.
So, in essence, the tax structure remains the same. Dividends and divestment proceeds are budgeted below revised estimates.
The budget focuses on spending. Capital expenditures in 2022-23 are expected to increase by 35.39% from the 2021-22 budget estimates and by 24.5% from the revised estimates. But the increase in total spending is quite modest.
They are 13.25% higher than the previous year’s budget forecasts and 4.6% higher than the revised forecasts. The government could very well have budgeted a higher level of total expenditure if the revenue forecast had been set at a higher level. When it comes to spending, the big question is always how well projects are being executed.
The budget also addressed some of the other issues such as digital currency. The steps taken to introduce a digital currency by RBI and a 30% capital gains levy on virtual assets are steps in the right direction. Details need to be worked on.
The budget says very little about jobs and employment. I always thought that the best way to promote employment was to have a higher growth rate. Growth is the real answer. If the budget and the measures taken by the government and others result in higher growth of 7-7.5%, most of the poor results of the pandemic in terms of job loss can be covered.
The expenditure program shows a significant drop in subsidies. As for the revised estimates for 2021-2022, the budget for 2022-23 foresees a reduction in fertilizer subsidies of ₹35,000 crore and ₹86,000 crore in food subsidies. Is it desirable and feasible? There is no mention of how this is to be achieved. Only one accounting entry can remain.
The 2021-2022 budget deficit at 6.9% of GDP is slightly higher than budget estimates. For 2022-2023, the budget estimate is 6.4% of GDP. We understand the compulsion in a difficult situation like the present one. But fiscal prudence has its own advantages. The medium-term objective should not be forgotten. Interest payments are estimated at 42.7% of the Centre’s revenue in 2022-23. It’s a big preemption.
The debt-to-GDP ratio in the coming year will reach 60.2%, far from the desired level of 40%. Policy makers need to review the fiscal consolidation program.
Thus, the strength of the budget is its emphasis on capital spending. However, a greater push towards fiscal consolidation is needed.
The author is former Chairman of the Economic Advisory Council to the Prime Minister and former Governor of the Reserve Bank of India
February 01, 2022