The budget for 2022-23 has been prepared under extremely challenging circumstances. Despite growth of around 9% in 2021-22, our economy remains fragile to recover from the Covid shock, prompting the Monetary Policy Committee to maintain its accommodative monetary-policy stance and current policy interest rates. Is. Data on employment, consumption and wealth point to a sharp increase in inequality and distress among all workers and the self-employed in the unorganized sector. Inflationary pressures persisted due to supply chain disruptions and rising oil prices. Consumer price index inflation remains within the Reserve Bank of India’s target band at 5.6 per cent, but food inflation has exceeded 9% and wholesale price inflation has exceeded 13.6 per cent. Moreover, even before the recent post-budget spike, bond yields were elevated. Lastly, the expected rise in US interest rates is leading to a net outflow of foreign portfolio investment (FPI) and foreign exchange. Faced with challenging circumstances, Finance Minister Nirmala Sitharaman has bet on growth to ease all other pressures. The hallmark of this budget is the increase due to the massive increase in capital expenditure (capex). After correcting for capital infusion of 51,971 crore in Air India, expected to increase out of capital expenditure From 2021-22. 5.5 trillion in Revised Estimates (RE) for 7.5 trillion in the Budget Estimate (BE) for 2022-23, a breathtaking 36% annual growth on top of a 35% jump in 2021-22. The majority of this planned increase is for infrastructure.
Heavy capital expenditure growth is planned along with the process of financial consolidation initiated last year. The fiscal deficit was narrowed sharply to 6.9% in 2021-22 (RE) from a pandemic-driven high of 9.2% of gross domestic product (GDP) in 2020-21, and further reduced to 6.4% in 2022-23 Is. , The consolidation in 2021-22 was premature, but is now necessary in view of continued inflationary pressures, higher bond yields and net FPI outflows. The plan to cut the fiscal deficit by 0.5% of GDP is also realistic and on track to achieve the target of 4.5% by 2025-26 (as announced last year). How will the massive increase in the Centre’s capital expenditure be financed, with an emphasis on reducing the deficit? This will be partly financed by higher receipts, particularly higher tax revenue, and partly by reducing revenue expenditure.
On the receipts side, both tax revenue and the Centre’s share are projected to grow at 9.6%. The implied jump of 8.7% is conservative, in line with the projected nominal GDP growth of 11.1%. The marginal tax revenue estimate is mainly on account of reduction in excise duty on petroleum products. However, the GST has now stabilized and the Central GST is projected to grow at 15.8% in 2022-23. Direct taxes are also projected to grow at a high 13.6%, thanks to several administrative and legal rationalization measures. Overall, the Centre’s share in tax revenue, which accounts for around 85% of total non-debt receipts, would have increased by around 43% compared to the pre-pandemic level. 13.6 trillion in 2019-20, an impressive achievement.
Non-tax revenues and their main components, dividends and surpluses of public enterprises, are expected to decline for the third consecutive year. This is mainly due to less provision for dividend from RBI. Non-debt capital receipts are also projected to decline by 29.7%, mainly due to an estimated 16.7 per cent decline in disinvestment receipts. This has been widely criticized, but rather than pursuing unrealistic goals, it is better to set a modest but realistic goal.
Compression of revenue expenditure is another means of financing the huge jump in capital expenditure within the limits of the limited fiscal deficit. revenue expenditure is almost flat 31.9 trillion in 2022-23 as compared to 31.7 trillion in 2021-22, a substantial shortfall in real terms. Squeezed between this cap on total revenue expenditure and the bulk of the committed expenditure like interest payments, wages and salaries, pensions etc., the ax has fallen on discretionary social security programs such as food subsidies and income support for farmers (PM-KISAN) . and rural workers (MGNREGA). For all of them, the allocation in 2022-23 is less than in 2021-22. This seems remarkably reckless at a time when there is much evidence of widespread distress. It is also inconsistent with the explicit budget strategy of maximizing the multiplier effect of government expenditure on output and employment. Capex actually has a stronger multiplier effect than revenue expenditure. Yet, programs such as MGNREGA, PM-Kisan and food subsidies for the poor have an even greater multiplier effect as the poorest have the highest propensity to consume. A small increase in capital expenditure could have avoided these cuts in social security schemes. The even modest budget increase, in fact, in health expenditure is disappointing, as we are yet to recover from the pandemic.
Despite fiscal consolidation, the deficit will still remain high. Gross market borrowing, the main source of deficit financing, is by far the highest, at about . Will happen 15 trillion. This raises concerns about the impact of such a large lending program on economic and financial stability. This would add to inflationary pressures, while yields on dated securities had already increased post-budget. Net FPI and foreign exchange outflows are also picking up. The Finance Ministry and RBI can expect tough days ahead.
These are personal views of the author.
Sudipto Mundele is the President of the Center for Development Studies.
Never miss a story! Stay connected and informed with Mint.
download
Our App Now!!
,