On the other hand, the program of fiscal consolidation needs to be further strengthened.
The apparent thrust in the Union Budget on expansion of capital expenditure is a welcome directional change, especially since 45.2% of the fiscal deficit is being devoted to fiscal capital expenditure. This will help accelerate growth not only in the current year but also in the years to come. However, the program of fiscal consolidation needs to be further strengthened. As of now, it remains unclear. It becomes necessary to revisit the expected earnings growth for 2022-23 and its impact on the revenue projections.
outlook on growth
The Union Budget for 2022-23 provides a nominal GDP growth forecast of 11.1% for 2022-23. On the other hand, the Economic Survey had provided a real GDP growth range of 8%-8.5% for this year. Taking the low end of the real GDP growth estimate of 8%, an implied price deflation (IPD) based inflation of 2.9% would provide a modest growth of 11.1%. However, real GDP growth of 8% can be considered somewhat optimistic, as 2022-23 will be the first normal post-pandemic year where no significant base effect may be available. In fact, at the end of 2021-22, real GDP is estimated at ₹147.5 lakh-crore in volume terms, compared to ₹145.1 lakh-crore in 2019-20, using NSO data released on January 31. Slightly higher than the level. , 2022. In fact, in the second half of 2021-22, when there were no base effects, real GDP growth using the latest available quarterly data was only 5.6%. Real GDP growth of 7%-7.5% in 2022-23 appears more realistic. However, this cannot undo the budget’s assumption of a modest growth of 11.1%. In fact, IPD based inflation may remain relatively higher in 2022-23 as WPI inflation rates are likely to remain higher at least in the first half of 2022-23 as these are largely driven by higher global prices . Raw and primary products. A more realistic assumption of an IPD-based inflation of 5% and real GDP growth of 7.5% would have given a nominal GDP growth of around 13%.
revenue and expenditure
As of 2021-22 (RE), the Centre’s gross and net tax revenues are projected to grow by 24.1% and 23.8%, respectively. This indicates achieving a jump of 1.4 in each case. However, the jump has been brought down to 0.9 in 2022-23 (BE). Again, given the expanded digitization and formalization of the economy and tax assessees, the Centre’s tax buoyancy may exceed 0.9. If the under-assessment in both the tax buoyancy and the nominal GDP growth assumption were corrected marginally to say 1.1 and 13% respectively, the Centre’s gross tax revenue would have increased by 14.3% in real terms. This would have created the fiscal space for either increasing expenditure growth or accelerating the reduction in fiscal deficit. In fact, in 2022-23, total expenditure is projected to grow at only 4.6% with revenue and capital expenditure projected to grow by 0.9% and 24.5%, respectively. This is a welcome structural change in government expenditure in favor of capital expenditure. To the extent that these capital expenditures are related to non-defense expenditure, particularly in expansion to construction and other infrastructure sectors, they would be linked to a relatively high production and employment multiplier.
While the structural shift towards expansion of infrastructure is quite welcome, it provides greater transparency if the medium-term assessment of the National Infrastructure Pipeline (NIP) in the Budget is done in areas with less investment than the original targets. It reflects. The budget allows states a fiscal deficit limit of 4% of GDP to encourage them to expand their capital expenditure; Here, 0.5% marks have been marked for expansion of power infrastructure. In addition, states have been allocated Rs 1 lakh crore as 50-year interest-free loan for capital expenditure in 2022-23, which is higher than normal borrowings.
On the revenue expenditure side, the budgeted total subsidy has been reduced from 1.2% of GDP in 2022-23 to 1.9% in 2021-22 (RE). This is also a welcome structural change, provided that the food, fertilizer and petroleum subsidy numbers are not revised upwards during the year due to pressure generated by higher global crude oil prices. The interest payment burden as a percentage of GDP has increased from 3.5% in 2021-22 to 3.6% in 2022-23. In fact, interest payments may also come under pressure due to the government’s increased gross and net borrowings from the market linked to higher debt-GDP levels.
debt and fiscal balance
According to the estimates given in the Economic Survey for 2021-22, the general government debt relative to GDP is close to 90% at the end of 2021-22 and 2022-23. In the Medium Term Fiscal Policy cum Fiscal Policy Strategy Statement attached to the Union Budget, the Center’s debt at the end of these two years is estimated at 59.9% and 60.2% respectively. Thus, despite the fiscal deficit and GDP ratio coming down from 6.9% to 6.4%, the debt-GDP ratio is still expected to rise in 2022-23. This can be adjusted marginally downwards if the growth of nominal GDP exceeds what is projected in the budget. Such high debt-GDP levels pre-empt a significant portion of the government’s revenue budget. In fact, the interest payment ratio to revenue receipts stands at 39.1% and 42.7% in 2021-22 and 2022-23 respectively.
The reduction in fiscal deficit relative to GDP by 0.5% points between these two years is a welcome change. The medium-term fiscal policy statement indicates reaching a level of 4.5% by 2025-26. This means an average rate of decrease of 0.63% points per year over the next three years. It would have been best for a medium-term fiscal policy statement to clearly outline the fiscal deficit adjustment trajectory over the next three to five years. In fact, given the government’s high debt-GDP levels, the Centre’s Fiscal Responsibility and Budget Management (FRBM) Act needs to be re-examined to realign the debt and fiscal deficit to sustainable levels and realignment paths .
C. Rangarajan is the former Chairman of the Economic Advisory Council to the Prime Minister and former Governor of the Reserve Bank of India. DK Srivastava is the Chief Policy Advisor at EY India and former Director of the Madras School of Economics. views expressed are personal
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