The union budget for 2022-23 was prepared in trying circumstances. Both global and domestic macroeconomic situations were facing headwinds when the budget for FY23 was presented. The global economic recovery in 2021, which was V-shaped after the Covid-19 pandemic, had lost its momentum. The IMF’s World Economic Outlook (WEO), in their January 2022 review, pruned the world output growth by 50 basis points to 4.4% and the global trade volume growth by 70 basis points to 6% in 2022 over the October 2021 review. In 2022, two major economies – the USA and China would be growing much below their earlier projections. The global growth slowdown, partly attributed to the spread of the Omicron variant of Coronavirus, has coincided with rising commodity prices, particularly crude oil prices. Besides the demand-supply mismatch, geopolitical tension has also contributed to a spurt in crude oil prices. The US retail inflation at 7.5% in January 2022 was the highest in four decades as against the stipulated mandate of an average of 2%. The US Fed has already accelerated the tapering of the bond-buying program, which would be completed by March 2022. It is almost imminent for the US Fed to raise the Fed Rate in March 2022. The Bank of England and many other major economies have already raised their policy rates. The reversal of the interest rate cycle is likely to disrupt the capital flows to emerging and developing countries. Fiscal space is also limited globally due to the rising debt-GDP ratio in many countries of the world. The global headwinds are many, which may slow down the recovery further as the year progresses.   

According to the CSO’s first advance estimates, India’s real GDP growth is expected to witness a smart recovery of 9.2% in 2021-22 after a contraction of 6.6 % in 2020-21 – the highest ever decline in GDP in the post-independent period. However, 9.2% growth in FY22 has become doubtful as the ongoing third wave of the coronavirus since December 2021 has restricted the free mobility of men and materials considerably. Adjusted for the negative base effect, the real GDP growth may work out to hardly 1.5% in FY22. The RBI has projected India’s GDP growth at 7.8% in FY23, compared to 8%-8.5% by the Government and 9% by the IMF. Both retail and core inflation remain elevated in the last two years, surpassing the RBI’s upper tolerance limit of 6% in January 2022. This is an indication of the retail inflation being generalized. The WPI inflation is in the double-digit for several months due to rising cost pressure, which may spill over to the CPI inflation in due course. Global crude oil prices may spoil the price situation in India further. Many economists believe that the RBI’s recent projection of India’s CPI inflation at 4.5% in FY23 is grossly underestimated. While growth needs public policy support the space for monetary policy is limited due to rising inflationary pressures and reversal of the global interest rate cycle. Under this backdrop, an attempt is made here to study how the Union Finance Minister has done the balancing act between supporting growth and pursuing fiscal prudence, at least in the medium term while presenting the budget for FY23.

II. Are Budget Numbers Credible?
The total expenditure proposed in the FY23 Budget is Rs.39.4 trillion, which is 13.4% higher than Rs.34.8 trillion in FY22 (BE). The revenue receipts anticipated in the FY23 budget are expected to increase by 9.6% to Rs.22 trillion from Rs.20.8 trillion in FY22 (RE). Revenue receipts are realistic keeping in view the large base effect in FY22 and reduction in excise duty on petrol and diesel by the union government in 2021. The gross fiscal deficit (GFD) at Rs.16.6 trillion (6.4% of GDP) in FY23 is higher in absolute terms compared to Rs.15.9 trillion (6.9% of GDP) in FY22, but lower by 0.5% in terms of GDP. Hence the budget for FY23 is expansionary and growth-supportive, but not profligate as fiscal prudence is visible in spirit. The glide path proposed in the last year’s budget to achieve GFD at 4.5% of GDP by FY26 has been retained. The disinvestment proposal in the FY23 budget at Rs.0.65 trillion is achievable compared to Rs.1.75 trillion (BE) and Rs.0.78 trillion (RE) in FY22. The revenue expenditures at Rs.31.9 trillion in FY23 are hardly 0.9% higher than that of Rs.31.7 trillion in the previous year. The union government seems to have exercised utmost caution to keep the revenue expenditure almost at the last year’s level. The capital expenditure at Rs.7.5 trillion in FY23, constituting 2.9% of GDP, is higher than the previous year’s BE and RE by 35.4% and 24.5% respectively. If grants-in-aid to the states are added, total capital expenditure would be Rs.10.7 trillion, – the highest ever annual capital expenditure in India constituting 4.1% of the GDP.

The gross market borrowing of the union government is nearly Rs.15 trillion in FY23 as against Rs.12 trillion in the previous year. This has already put pressure on the G-sec yield. The turnaround in the global interest rate cycle and liquidity tightening would contribute to the hardening of G-sec yield further. As the debt-GDP ratio has already gone up, interest payments in FY23 would be much higher at Rs.9.4 trillion compared to Rs.8.1 trillion (RE) in FY22. About 95% of the revenue deficit in FY23 is due to interest payments alone. The union budget assumed nominal GDP growth of 11.1%, which appears conservative compared to an optimistic real GDP growth of 8%-8.5% in 2022-23 projected in the 2021-22 Economic Survey. If the GDP deflator remains around 4.5%, the nominal GDP growth maybe around 13% in FY23. This is likely to cushion the GFD ratio in FY23, even if there is a shortfall in the realization of disinvestment receipts. On the whole, the budget numbers are credible and may be realized if the budget assumptions are met.

III. Balancing Act in the Budget
We have seen how the budget has balanced between promoting growth through large capital expenditure and pursuing fiscal prudence by freezing revenue expenditure. Several areas of such balancing acts would be discernible from the major focus areas of the budget. One such area of the balancing act relates to putting almost equal emphasis on physical and digital infrastructure. PM GatiShakti master plan, encompassing the development of roads, ports, railways, airports, mass transport, waterways, and logistic infrastructure, constitutes the seven livers of physical infrastructure, which has been pursued more vigorously in the budget than the national infrastructure pipeline suggested earlier. To improve productivity, both physical and digital infrastructures are needed. Innovative proposals in the budget for promoting digital infrastructure include, inter alia, 5G auctions, central bank digital currency, core banking solution for 1.5 lakh post offices, digital teacher, virtual labs, digital university, digital banking in 75 districts, one nation one registration software for land record management, e-passport, etc. The virtual economy has a tremendous potential to generate employment besides improving productivity.

The urban-rural divide in India is intense. Therefore, both financial inclusion and digitization are required. While the former is necessary to integrate the people at the bottom of the pyramid with the mainstream the latter is required to increase productivity in the economy. The nature of financial inclusion proposed in the FY23 budget is different from the earlier years. Besides direct benefit transfers to the poorest of the poor, the procurement of rice and wheat would also be done through DBT to farmers. Moreover, financial inclusion would be more tech-driven than subsidy-driven such as Kisan drones, digital high-tech services to farmers, up-gradation of 2 lakh Anganwadis, core banking solution for 1.5 lakh post offices, digital banking units in 75 districts, e-VIDYA for 200 TV channels, change of syllabus in agricultural universities, etc. In the process, the rural people will also get the benefit of modern technology besides participating in the development process.

The MSME sector was the worst sufferer during the pandemic. The Emergency Credit Line Guarantee Scheme, introduced last year, has been extended for one more year. The guarantee amount has been augmented by Rs.50,000 crore to Rs.5 trillion. In the case of government procurement, 75% of the running bill of MSMEs will be paid within 10 days.  Moreover, 80 lakh affordable housing in FY23, tap water for all, and inter-linking of five rivers would generate employment for the unskilled labourers. Besides the continuation of the productivity-linked incentive scheme, startups will continue to receive encouragement and tax benefit. The food processing industry will receive encouragement. These proposals would expedite the process of formalization of the economy and reduce the urban-rural divide.

Another area of the balancing act, which is paramount in the twenty-first century is protecting the environment against unfettered exploitation of natural resources. While developing the physical and digital infrastructure, the government is mindful of the commitment to climate and environment. Notable proposals on environmental safety are organic farming across the 5-km corridor of the river Ganga, green clearance under one window, clean and sustainable mobility (solar energy, electric vehicles, battery swapping), promotion to sunrise industries (artificial intelligence, drones, semiconductors), transition to the carbon-neutral economy, management of the circular economy (e-waste, end-of-use vehicles, treatment of industrial waste), green bonds, etc.

There is a debate whether growth should be promoted by investment or productivity. The answer is both. A high rate of growth is possible either through high investment, which is usually the case in most developing countries, or through augmenting productivity, or both. The government has been sustaining large capital expenditures, which is expected to crowd in private investment. However, private investment has been sluggish in India for quite some time. Gross Fixed Capital Formation (GFCF) as a proportion to GDP at current prices in India has declined from about 35.8% in 2007-08 to below 30% since 2015-16. The bulk of the GFCF comes from private investment and therefore public investment cannot be a substitute for private investment. For financing investment through private equity and venture capital, the government has proposed to set up a high-power committee. Several investment proposals will be implemented through the public-private partnership (PPP) model. The benefit of setting up the National Bank for Financing Infrastructure and Development (NaBFID), and National Asset Reconstruction Company (NARC) in FY22 will accrue this year onwards. Innovative financing through Real Estate Investment Trust (REIT) and Infrastructure Investment Trust (InvIT), set up earlier, will help revive private investment.

In this year’s budget, one of the key focus areas is improving productivity as mentioned above. The concrete action plan for improving productivity keeping in view climate commitment includes, inter alia, ease of doing business 2, green clearance under one window, e-Passport, clean and sustainable mobility, land record management through software, an amendment to IBC for the accelerated corporate exit, 5G auction, promoting sunrise opportunities, solar energy, transition to the carbon-neutral economy, circular economy (management of e-waste, end-of-use vehicles, treatment of industrial wastes), etc. The budget is forward-looking and can be considered as a foundation for rapid growth in the next 25 years.

The government has proposed an expansionary budget without major changes in the taxation system except marginal tinkering here and there, particularly in the case of direct taxes, mostly for rationalisation. The notable tax proposal in FY23 relates to the taxing of virtual digital assets (cryptocurrencies) at the rate of 30% above a monetary threshold. The loss sustained in such transactions cannot be set off. Even the gift of virtual digital assets will be taxed in the hands of the recipients. There will be one percent TDS for such transactions in the crypto exchanges. The budget does not provide instant benefit in terms of tax concession to the people, but the benefit of government expenditure, particularly capital expenditure will accrue to the people when they are engaged in economic activities.

IV. Economic Implications
This year’s budget has a long-term vision. The existing structural reforms shall continue to their logical conclusion. Large capital expenditure by the government would support the economic recovery. A big push to technology, particularly digitization, would improve productivity and sustain growth for the next two decades or more. The government has refrained from freebies like free electricity, free water, free ration, etc., except continuing with targeted social interventions for marginalized sections of the society. Growth alone can provide opportunities for people to earn their livelihood as there is no free lunch. The budget is expansionary/pro-growth, but not inflationary. However, the upside risks to inflation exist from external sources as crude oil prices are likely to remain elevated. The stock market and rupee exchange rate may be volatile due to turnaround in the interest rate cycle globally.   Pressure on G-sec yield may continue due to large government borrowings. As the fiscal dominance is high, it would be difficult for the RBI to sustain the accommodative stance of monetary policy for a longer period in 2022.   

*The author is RBI Chair Professor in Utkal University, and former Principal Adviser, Monetary Policy Department of RBI. Views are personal. 

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