At the end of the day the Union Budget is not judged by its objectives but by the outcome, similarly the measures envisioned are less visible than the execution. Stability in economic policy and tax rates maintain the confidence of stakeholders. This is important for both citizens at large and financial markets. Credible pursuit of goals like fiscal deficit , borrowings, disinvestment, etc. would give confidence to the markets to adjust to occasional slippages in targets and make their reactions less volatile. Every budget has to balance between sensible economics and political acceptability. So the context in which the budget is presented is quite important.
The 2022-23 fiscal year is going to be marked by a glimmer of hope, which is different from the all pervasive uncertainty that enveloped the budget making process of 2021-22. The ‘First Advance Estimates of National Income 2021-22’ indicate that GDP in real terms will grow at 9.2% in 2021-22; this can get marginally affected by the Covid third wave in the Jan-March quarter. It is useful to note that real GDP at Rs. 147.5 lakh crores would be about 1.2% higher than that of 2019-20, a non-Covid year. This 1.2% could come down to 1% due to the third wave’s adverse impact, notwithstanding this possibility it cannot be denied that the economy is in recovery mode, that too in a very difficult year. Comparing consumption, capital formation and net exports between 2019-20 and 2021-22, it is quite apparent that private consumption expenditure is lagging behind. It has come down from Rs. 83.21 lakh crores in 2019-20 to Rs. 80.8 lakh crores in constant 2011-12 prices.
There is little doubt that covid has affected household income, employment and jobs. The impact on certain sectors is more severe than others. It is becoming fashionable to suggest that technology based firms (digi-tech, biotech, green tech), large organised sector firms in manufacturing and services have successfully participated in the economic recovery process and benefitted from it, at the same time MSMEs and household industries continue to suffer. However, this is not the entire story, sector wise analysis of NSO data makes it apparent that agriculture, mining, manufacturing, Electricity, Gas, Water Supply & Other Utility Services, etc. are in a recovery mode. However, the services sector which accounts for 32% of labour force is still languishing; the third wave has only prolonged the process. Within services sector, trade, hotels, transport and communication, etc. sub-group is the worst affected, its GVA in 2011-12 prices has come down from Rs. 27 lakh crores to Rs. 24.7 lakh crores between 2019-20 and 2021-22. In other words, contact based services oriented towards the domestic market have a major problem, a large part of this sector is unorganised and needs a safety net urgently.
For the 2022 budget the key question is what should the fiscal policy focus on to ensure a steady recovery process. There are several priority areas which need immediate attention. These include 1) supportive measures for life and livelihood. 2) stimulus for economy and 3) fiscal consolidation signals for the market. Supportive measures include vaccination funding, health infrastructure creation and relief and rehabilitation for the section of the population adversely affected in terms of income and employment. For years health related combined budgetary expenditure of Centre and States as percentage did not exceed one percent; the international norm is 3%. Consequently, India’s hospital beds per thousand, doctors per thousand and health workers per thousand are less than the international norm. Steps in this direction are urgently needed. In the area of livelihood the unorganized urban workers in contact based services like trade, hotels, transport and communication and several others do not have a MGNREGA, there is an urgent need to create a safety net.
By stimulus measures one essentially means front loaded government capital expenditure particularly in infrastructure; this can crowd-in private investment. Higher overall investment would lead to higher GDP growth and higher tax revenue collection based on the buoyancy. Capital expenditure as a proportion of total budget went up significantly 2021-22, this needs to be enhanced further. However, capital expenditure by itself is not sufficient to give the cent percent thrust for capital formation. Time and cost over runs reduce the efficacy of capital expenditure. Secondly, in many infra-projects State and Centre have to work together, the States may not have the funds. For example, for a National Highway to be effective the States must build the feeder roads, bridges, flyovers etc.
Basically, allocation in a capital budget does not mean it will be spent in the same year, secondly spending does not mean cost effective spending, as costs can go up due to project slippages. The entire area needs close co-ordination and monitoring between Centre and States and various departments.
So far as Fiscal consolidation is concerned, markets always get fidgety when an overall framework for keeping fiscal deficit in check get jettisoned. Fortunately, it seems that actual fiscal deficit in 2021-22 will be contained at 6.8% of GDP. In 2022-23, it may not exceed 6% as suggested by the 15th Finance Commission. This will provide the much needed signals to the market about government’s borrowing requirements. In fact the 15th Finance Commission has suggested that the deficit should come down to 4.5% by 2025-26, which could be a feasible target if normalcy returns.
Finally one is quite optimistic, with a 7.0% real GDP growth rate in 2022-23 with a 5.5% inflation and tax buoyancy of 1.2 one can get 15% growth in gross tax revenue; this coupled with disinvestments, particularly the spillovers from 2021-22 should give sufficient fiscal space to the Government.
Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.
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