What to expect from this year’s Union Budget

The finance minister is likely to focus on the economy beyond the pandemic. Energising medium-term growth drivers will be key and the government should target high capex growth to sustain the infrastructure development momentum
The perennial dilemma of the budget — between spending to stimulate growth and maintaining fiscal discipline — is more accentuated in a year such as this when economic recovery has been uneven and the fiscal situation, precarious. (MINT) PREMIUM
The perennial dilemma of the budget — between spending to stimulate growth and maintaining fiscal discipline — is more accentuated in a year such as this when economic recovery has been uneven and the fiscal situation, precarious. (MINT)
Updated on Jan 28, 2022 08:53 PM IST
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BySamiran Chakraborty

When the finance minister (FM) stands up in Parliament to present her second pandemic-era budget on February 1, the lingering effects of the Omicron wave would be in her mind, but she will also have to focus on the economy beyond the pandemic. The perennial dilemma of the budget — between spending to stimulate growth and maintaining fiscal discipline — is more accentuated in a year such as this when economic recovery has been uneven and the fiscal situation, precarious. However, energising medium-term growth drivers is equally important and the budget could pleasantly surprise us if it emphasises this aspect.

But before we delve into that, we need to understand the rather mundane budget maths and the choices in front of the FM. Taking a step back, FY22 has been phenomenal in terms of gross tax revenue growth — expected to be around 34%, almost double that of nominal Gross Domestic Product (GDP) growth. It is likely to exceed the budget targets by ?3.6 lakh crore and adequately compensate for any shortfall in divestment revenues and additional expenditure in mitigating the impact of the second wave of Covid-19. Therefore, it is possible that the government will comfortably meet its FY22 fiscal deficit target of 6.8% of the GDP without any additional financing.

FY23 revenue estimates could be a little tricky, though. It is unlikely that a similar tax buoyancy will repeat itself. In fact, with the reduction in duties on petroleum products announced in November, the government might have a more conservative estimate of tax revenue growth, returning close to the nominal GDP growth.

That will put the focus on how aggressive the government will be in setting its divestment and asset monetisation targets. While these big-ticket items impart volatility and uncertainty to the government’s revenue stream, they also provide the flexibility to undertake some discretionary expenditures. We would expect the budget to target another year of more than ?1 lakh crore divestment revenue as some of it spills over from this year to the next and hope that there is some explicit accounting of the revenues from the asset monetisation pipeline.

On the other hand, how much the government would be able to spend is not just a function of the revenue estimates, but also depends crucially on what is a politically acceptable, judicious choice of fiscal deficit target. In our view, any fiscal deficit estimate in the range of 6.0-6.4% of GDP for FY23 would be in the realm of possibility. The precise choice of the deficit number would depend on the need to demonstrate populist or growth bias versus the intent of taking a firm step towards achieving the 4.5% of GDP deficit target by FY26.

If the government decides to peg the deficit closer to 6.4% of GDP, then it will be left with almost two percentage points of GDP deficit reduction target in three years, which could be challenging. On the other hand, the “extra space” of 0.4 percentage points of GDP (around ?1 trillion) could be crucial in boosting the demand side in a politically significant year.

The importance of this “extra space” for spending becomes apparent if we look at the composition of expenditure. We estimate that almost 80% of total expenditure is pre-committed towards items, which provide limited manoeuvring space. These include interest payments, pensions, salaries, defence and grants to states.

Even with these overarching constraints, the FM was able to increase public capex by around 26% in last year’s budget. It is a different story that actual capex is lagging behind these budget estimates and capex growth needs to be 53% year-on-year in the last four months of FY22 to meet budget targets.

However, that should not deter the FM from targeting another year of high capex growth (15-20% at least) to sustain the infra development momentum and lay the groundwork for a private capex revival in the latter part of the year. In our view, capex remains the most important medium-term growth driver, without which the virtuous cycle of investment-job growth-consumption will not flourish.

While some precious fiscal resources will be needed to help build social infrastructure such as health and education too, hopefully some savings can be made in the extraordinary Covid-related broad-based safety net spending of ?1.5-2.0 lakh crore in FY22. Part of this can also be channelised into targeted demand stimulus for the sections most affected in the pandemic without sacrificing the overall quality of expenditure.

Financing all these diverse needs would possibly require that the government will have to borrow more than ?12 lakh crore in FY23, marginally higher than FY22. In the last few years, the Reserve Bank of India had come to the rescue by buying 20-25% of the issuances but with the possible monetary policy normalisation, any support from the central bank could be difficult to come by.

That is why the changes in capital gains taxation required to open up the possibility of India’s inclusion into Global Bond Indices will be critical in this budget.

This can usher in $20-25 billion investor inflows over a period of time, provide stability to bond yields and offer the required bandwidth to the government to support medium-term growth objectives.

Samiran Chakraborty is managing director and chief economist, India, Citigroup

The views expressed are personal

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Saturday, May 21, 2022