Budgeting to Normalize Growth – The Hindu BusinessLine


The Centre’s 2022-2023 budget introduces a number of key structural changes. First, it gives a significantly higher priority to capital spending in total spending. Second, in the composition of capital spending, it puts more emphasis on non-military capital spending. These structural changes, if sustained in the medium term, would lead to sustained growth, of which 2022-23 is the first normal post-Covid year.

Growth prospects

The budget gives only one growth figure which relates to nominal GDP growth. The estimated growth in 2022-23 compared to 2021-22 at current prices is 11.1%. If this is juxtaposed with real GDP growth for 2022-23 of 8-8.5%, inflation based on the implicit price deflator (IPD) can be estimated at 2.9% for which the lower bound of 8 % real growth was used. This is a sharp reduction in the DPI-based inflation rate of 7.7% in 2021-22. This high inflation was fueled by global supply-side pressures and high world prices for crude and primary commodities. There are no signs of these pressures easing in the near future. As such, the pressure of imported inflation could continue on the WPI as well as the IPD-based inflation. Thus, a large reduction implicit in the budget figures appears to be an understatement. There is another dimension of such an undervaluation concerning the dynamism of the Centre’s gross tax receipts.

Tax performance and outlook

The Centre’s gross tax revenue increased by 24.1% in 2021-22 with a surge of 1.4. This sharp acceleration in tax revenue growth is the product of nominal GDP growth and fiscal dynamism. The increase in fiscal dynamism is largely due to the better performance of direct taxes in 2021-22, which increased by 32.3%. The improvement in the dynamism of direct taxes, to a large extent, is due to the increase in the formalization and digitalization of the economy, in particular of the business sector and personal income tax payers physical. Based on these qualitative changes, it would be reasonable to expect sustained momentum above the 0.9 assumed in the budget. Thus, it is possible to create additional fiscal space due to both higher-than-expected nominal GDP growth and dynamism. This can be useful for some of the likely sub-items in the revenue expenditure budget, including major grants that are budgeted to contract in nominal terms. These may increase as they are largely tied to world crude prices.

Expenditure structure

The most notable feature of the budget is the change in the structure of government spending in favor of capital spending. In fact, the 24.5% capital spending growth in 2022-23 is significantly higher than the corresponding 0.9% growth in revenue spending. This also implicitly improves the quality of the budget deficit as a much higher proportion of 45.2% of the budget deficit is now allocated to investment spending in 2022-23. Within capital spending, capital spending is also structured in favor of non-defense spending which has a higher multiplier effect. On the spending side, however, total spending is only expected to increase by 4.6% in 2022-23. It may need to be increased to make this budget more truly fiscally stimulating.

Debt and progressive reduction of the budget deficit

The Centre’s debt is estimated at 59.0% of GDP at the end of 2022-23. The FRBM target according to the 2018 amendment is 40%. The downward adjustment path to close this 19 percentage point gap depends on the profile of the fiscal deficit, nominal GDP growth and the effective interest rate. The interest rate determines the ratio between interest payments and receipts. This would remain under pressure as long as the debt-to-GDP ratio is high. In fact, domestic interest rates may be pushed higher by global pressures, also as money returns to the United States and other developed countries as their interest rates rise. Careful calibration of the medium- to long-term fiscal consolidation path is needed as part of a sound fiscal strategy. There may be a need to form a new FRBM committee, as suggested by the Fifteenth Finance Committee.

The opinions expressed are personal.

The author is Senior Policy Advisor, EY India and Former Director, Madras School of Economics

Published on

February 01, 2022


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