With vision but shorn of populism
As has always been the case in the past, most of us wanted the finance minister to present a popular budget this time as well. After all, the economy is doing well again and the government has more money in its coffers. But she disappointed. What is worse is that her entire budget speech hardly contained anything that could be an input for an eye-catching headline. If the broad underlying themes and objectives of the budgets presented by the minister so far during her tenure are anything to go by, a clear departure from the past is visible: no playing to the gallery and a clear refusal to play the role of a super ‘mai baap’ by announcing tax and debt reliefs, handouts and sops to keep vote banks happy and opinion-leaders delighted.
Strategy in the aftermath of Covid pandemic
Even long after the enactment of the FRBM Act in 2003 whose main aim was to ensure inter-generational equity in fiscal management, the political class of the country was not fully aware that the use of the fiscal for short-term political expediency would prove to be time-inconsistent. The appearance of the Covid-19 pandemic in March 2020 and its virulent spread subsequently in successive waves causing widespread death and distress, particularly in the rural and semi-urban areas. This laid bare the glaring inadequacy and inefficiency in India’s social and economic infrastructure, building and maintaining which are the direct responsibility of the government. Nonetheless, the pandemic has, perhaps, caused a shift in the strategic thinking in the government leading to a realisation that the country needs fiscal and macroeconomic buffers to deal with shocks such as this. If true, this realisation should cause the government and the RBI to pursue a countercyclical fiscal, monetary and regulatory policies.
No playing to the gallery and a clear refusal to play the role of a super ‘mai baap’ by announcing tax and debt reliefs, handouts and sops
In parallel, the current political establishment seems of the view that the creation of economic opportunities on a sustainable basis for the poor and middle-income groups combined with welfare spending for their long-term financial and social resilience would reap much higher electoral benefits for it than freebees and reliefs would. One is able to read the budget for 2022-23 more meaningfully, when viewed from this perspective.
To be sure, there are other valid perspectives as well. The bond market expected the fiscal deficit in the revised estimate to be lower than 6.9 per cent, given the spurt in tax collection, a fact which the minister showcased in her speech. Another source of some disappointment was no announcement in the budget on the inclusion of Indian government securities in global bond indices. The yield of the benchmark 10-year government security rose by a whopping 20 basis points to 6.86%, as a consequence. A nearly 32 per cent increase in the net market borrowing requirement for 2022-23 also caused considerable discomfort.
Capital spending revival
One distinguishing feature of this budget is in its big emphasis on capital spending/public investment in infrastructure and other projects and its strong belief that this will ‘crowd in’ private investment which has been very lacklustre for some years now. The multiplier impact of a public investment-led investment cycle on output, employment and demand in 2022-23 and beyond will be enormous, it avers. The government is asserting that public investment has a pivotal role to play now in nurturing growth and taking it to a higher trajectory in a sustainable manner.
The pursuits here are all visionary and the goals lofty and transformative. But these are not impossible feats to achieve, as there has already been significant progress in the recent years in railways, in renewable energy generation and in the use and entrenchment of technology in government departments, including in tax administration.
The four priorities laid for this purpose, viz. PM GatiShakti, Inclusive Development, Productivity Enhancement & Investment, Sunrise Opportunities, Energy Transition, and Climate Action, and financing of investments. The pursuits here are all visionary and the goals lofty and transformative. But these are not impossible feats to achieve, as there has already been significant progress in the recent years in railways, in renewable energy generation and in the use and entrenchment of technology in government departments, including in tax administration.
Capital expenditure in 2022-23 budgeted at Rs. 7.50 lakh crore will be 2.9 per cent of the GDP. If the Grants-in-Aid to States for creation of capital assets is included, it increases to about 4.1 per cent of GDP which is historically very high.
On top of this, the Central government will provide a 50-year interest free loan totalling Rs. 1 lakh crore to the States to enhance the latter’s capital investment for the creation of productive assets and generation of remunerative employment. Though this amount is relatively modest, yet it surely will mean some revival in capital spending in quite a few States.
A lot depends on whether private investment will be forthcoming in a timely manner
By all indications, many of the projects for the budgeted capital expenditure will be in PPP mode. Hence, a lot depends on whether private investment will be forthcoming in a timely manner. The government has committed to taking measures that will enhance financial viability of projects with technical and knowledge assistance from multi-lateral agencies. Enhancing financial viability will also be obtained by adopting global best practices, innovative ways of financing, and balanced risk allocation. These are laudable aims, no doubt. But one wonders whether the government has put in place professionally sound and globally recognised standards and mechanisms for project identification, evaluation, and execution, on the one hand and post-facto assessment of their performance vis-à-vis predefined financial and economic benchmarks, on the other. Further, does the government have skilled human resources to do all this?
The revised estimate of the fiscal deficit for 2021-22 at 6.9 per cent (of GDP) is a tad higher than the projected figure of 6.8 per cent (of GDP). The estimate for 2022-23 is 6.4 per cent of GDP, which, as per the minister, is consistent with the broad path of fiscal consolidation announced by her last year to reach a fiscal deficit level below 4.5 per cent of GDP by 2025-26. This goal appears a bit ambitious. In 2021-22, the revised revenue receipts exceeded the budget estimates by over 16 per cent which provided the rationale and impetus for higher revenue and capital expenditure.
In 2021-22, the revised revenue receipts exceeded the budget estimates by over 16 per cent
However, the likelihood of a similar buoyancy in tax and other revenue receipts happening again soon is small. Hence, a quick contraction in revenue deficit and primary deficit from their revised estimates for 2021-22 at 4.7 per cent and 3.3 per cent respectively looks difficult. That said, the government has sufficient incentives to be serious about it, because the bond market will continue to be vigilant on this issue, meaning thereby that any large slippages on this count will push the yield as also the government’s borrowing costs higher.
(The writer is a former central banker and a consultant to the IMF)