A Budget with a vision but little to lift everyone’s spirits
As has always been the case in the past, most of us wanted the Minister of Finance to also present a popular budget this time around. After all, the economy is doing well again and the government has more money in its coffers. But she disappointed. What’s worse is that his entire budget speech contained virtually nothing that could be an entry for a catchy headline.
If we are to believe the major underlying themes and the objectives of the budgets presented by the Minister so far during her mandate, a clear break with the past is visible: no play in the gallery and a clear refusal to play the role of a super ‘ may baap‘ by announcing tax and debt relief, handouts and concessions to satisfy pollsters and delight opinion leaders.
Strategy in the aftermath of the pandemic
Even long after the promulgation of the FRBM law in 2003, the main objective of which was to ensure intergenerational equity in budgetary management, the country’s political class was not fully aware that the use of taxation for short-term policies would turn out to be inconsistent over time. The onset of the Covid-19 pandemic in March 2020 and its subsequent virulent spread in successive waves causing widespread death and distress, particularly in rural and semi-urban areas.
This has laid bare the gross inadequacy and inefficiency of India’s social and economic infrastructure, the construction and maintenance of which is the direct responsibility of the government. Nonetheless, the pandemic may have caused a shift in the government’s strategic thinking, leading to the realization that the country needs fiscal and macroeconomic buffers to deal with shocks like this. If true, this realization should lead the government and the RBI to pursue counter-cyclical fiscal, monetary and regulatory policies.
At the same time, the current political establishment appears to be of the view that creating economic opportunity on a sustainable basis for poor and middle-income groups combined with social spending for their long-term financial and social resilience would yield electoral benefits for them. much higher. than freebees and rescues would. One is able to read the budget for 2022-23 more meaningfully, when viewed from this angle.
Of course, there are also other valid perspectives. The bond market expected the budget deficit in the revised estimate to be less than 6.9%, taking into account the increase in tax collection, a fact that the minister presented in her speech. Another source of disappointment was the absence of any announcement in the budget regarding the inclusion of Indian government securities in global bond indices. As a result, the yield on the benchmark 10-year government security rose 20 basis points to 6.86%. An increase of nearly 32% in the net market funding requirement for 2022-2023 has also caused considerable unease.
Resumption of capital expenditure
One of the distinguishing features of this budget is its emphasis on capital expenditure/public investment in infrastructure and other projects and its firm belief that this will “attract” private investment which has been very lackluster in recent years. now. The multiplier impact of an investment cycle focused on public investment on output, employment and demand in 2022-23 and beyond will be huge, he predicts. The government says public investment has a central role to play now to foster growth and bring it to a higher trajectory in a sustainable way.
The four priorities established for this purpose, viz. PM GatiShakti, Inclusive Development, Productivity Improvement and Investment, Sunrise Opportunities, Energy Transition and Climate Action, and Investment Finance. The activities here are all visionary and the goals ambitious and transformative. But these are not impossible feats, as there have already been significant advances in recent years in railways, in the production of renewable energy and in the use and entrenchment of technology in ministries, including tax administration.
Capital expenditure in 2022-23 budgeted at ₹7.50 lakh crore will be 2.9% of GDP. If subsidies to states for the creation of fixed assets are included, they increase to around 4.1% of GDP, which is historically very high.
In addition to this, the central government will provide the states with a 50-year interest-free loan totaling ₹1 lakh crore to enhance the capital investment of the states for creation of productive assets and creation remunerative jobs. While this amount is relatively modest, it will certainly mean some recovery in capital spending in a number of states.
By all indications, many projects for budgeted capital expenditures will be in PPP mode. Therefore, much depends on the availability of timely private investment. The government is committed to taking measures that will improve the financial viability of projects with the technical assistance and knowledge of multilateral agencies. Improved financial sustainability will also be achieved by adopting global best practices, innovative financing methods and a balanced distribution of risks. These are laudable goals, no doubt. But one wonders whether the government has put in place professionally sound and globally recognized standards and mechanisms for the identification, appraisal and execution of projects, on the one hand, and the ex-post evaluation of their performance by in relation to predefined financial and economic benchmarks, on the other. Moreover, does the government have qualified human resources to do all this?
The revised budget deficit estimate for 2021-22 at 6.9% (of GDP) is somewhat higher than the projected figure of 6.8% (of GDP). The estimate for 2022-2023 is 6.4% of GDP, which according to the minister is in line with the wide path of fiscal consolidation announced by her last year to reach a level of budget deficit below 4 .5% of GDP by 2025-2026. . This goal seems a bit ambitious. In 2021-22, revised revenues exceeded budget estimates by more than 16%, which provided the rationale and impetus for increased revenues and capital expenditures.
However, the likelihood that a similar dynamism in tax and other revenue will soon recur is low. Therefore, a rapid contraction of the revenue deficit and primary deficit from their revised estimates for 2021-22 to 4.7% and 3.3% respectively looks difficult. That said, the government has enough incentive to be serious about this, as the bond market will continue to be vigilant on this issue, which means any major slippage in this regard will drive up yield as well as investment costs. government loan.
The author is a former central banker and consultant to the IMF) (Through The Billion Press)
February 01, 2022