Number Theory: 4 numbers to watch out for in the Budget
The Budget is basically an account of the government’s expenditure and receipts. The former is largely a function of the latter. And the latter is mostly contingent on tax revenues.
Finance minister Nirmala Sitharaman will present her fourth Budget today. This Budget is the second after the pandemic and comes at a time when the third nation-wide wave of Covid-19 infections has just started to decline. India is inching towards fully vaccinating its adult population.
But while economic growth is beginning to revive, concerns about inequality and employment remain. The Budget also comes days ahead of the start of a crucial set of assembly elections. How should one evaluate the Budget and its ability to deliver on these economic and political challenges? For starters, here are the four numbers to look out for in the budget.
Nominal GDP growth assumption in the Budget
The Budget is basically an account of the government’s expenditure and receipts. The former is largely a function of the latter. And the latter is mostly contingent on tax revenues. Tax revenues are basically a function of nominal incomes. It is in keeping with this logic that the Budget projects a nominal GDP growth number as the basis for the entirely budgetary math. The 2021-22 Budget projected a nominal GDP growth of 14.4%. The nominal growth rate for 2021-22, as per the first advanced estimates released by the National Statistical Office (NSO) is significantly higher (17.6%) than this number. At 9.2%, the real GDP growth has turned out to be much lower than the last year’s Economic Survey forecast of 11%. In her interview to Hindustan Times last year, the finance minister described the survey’s projection of a higher nominal GDP growth (15.4% against the Budget’s 14.4%) as a “bit more flamboyant”. With the survey projecting a real growth rate of 8-8.5% this year, it will be interesting to see the nominal growth projection in the 2022-23 Budget. This number will matter because it will give a good idea about the government’s inflationary expectations for the next fiscal year.
Tax Buoyancy for 2021-22 and 2022-23
It is almost a given that Gross Tax Revenue for 2021-22 will exceed the Budget Estimates of 2021-22. However, whether this is a reflection of higher tax buoyancy – it is measured as change in taxes per unit change in GDP – is a question which remains to be answered. This is because higher tax collections could just be a result of higher-than-expected nominal GDP on account of high inflation.
The estimated tax buoyancy number for 2021-22 will only be known once the government releases the revised estimates (RE) for Gross Tax Revenues for 2021-22. The actual tax buoyancy for 2021-22 will be known once the provisional Gross Tax Revenue numbers for 2021-22 are released in May 2022. The tax buoyancy numbers, especially excluding union excise duties, will matter because they will be crucial in the government deciding against fuel taxes in cases crude prices continue to stay at present levels.
Will there be relief on the petrol-diesel price front?
Brent crude prices crossed the $90/barrel level days before the Budget. This is a first in eight years and analysts expect Brent to cross the psychological barrier of $100 this year. While retail petrol-diesel prices have not increased since 4th November, this is more a result of political expediency before elections than anything else. Will prices increase disproportionately once the elections are over in March? A lot will depend on whether or not the government brings down its expectations of union excise duty collections for 2022-23. While some sort of moderation is to be expected, given the union excise duty cut by the government in November 2021, absence of a large moderation will mean that petrol-diesel prices will continue to hurt in 2022-23 as well.
Will the Budget have a political game-changer for the elections?
While analysts and markets will be extremely interested in watching the fiscal deficit projection for 2022-23 and also the medium-term fiscal framework which the Budget lays out, the Budget cannot be oblivious of the political challenges facing the Bharatiya Janata Party (BJP). The forthcoming polls in five states are the immediate task at hand, but the BJP also needs to make sure that the economy, and more importantly those at the bottom of the pyramid see an improvement in their fortunes over the next year. The BJP will face another critical election in Gujarat at the end of 2022. There is growing anecdotal evidence that discontent over issues such as price rise, lack of jobs and crisis in the informal sector is beginning to grow. While there are expectations that the Budget will offer some relief on issues such as urban unemployment and the crisis in the informal sector, there is another aspect the Budget will have to keep in mind, namely the erosion of nominal benefits being offered currently because of inflation. For example, the real value of PM-KISAN transfers, which were started in the interim Budget of 2019-20, has fallen by 15.5% in the quarter ending December 2021. This underlines the importance of raising the nominal value of transfer under a flagship scheme like the PM-KISAN rather than announcing a new programme. It will be interesting to see whether the government exercises this option.