Budget 2022 balances growth with consolidation; clear head room for lowering fiscal deficit

By Atanu Chakraborty

India’s Budget is a unique instrument. Only a few emerging economies can boast of an instrument that combines policy statements along with the flow of not only the central Government funds, but also influences the spending of States. In a way it impacts monetary policy also. Although advanced economies have robust budget making instruments, I have observed in the aftermath of the Global Financial crisis that they lack a path setting annual policy document like ours and depend far too much on the monetary policy tweaks by their respective Central Banks. To the extent that, by 2019 the IMF was exhorting these economies to use fiscal instruments as monetary instruments.

As one of the Finance Minister’s shorter budget speeches this year, she laid emphasis on priorities for “Amrit Kaal”. These priorities are forward looking in the form of digital economy, energy transition, climate change and steps to crowd-in private investment. I do hope that subsequent budgets will use these as cornerstones. 

The Government has kept, by and large, the contours of our tax structure unchanged. Tax stability will remove lots of misgivings in the minds of business people and spur economic activity. I also noticed an interesting reform, which permits a taxpayer to file an additional return up to two years after the completion of the relevant assessment year. This reform has the potential to bring in larger tax revenues and reduce unnecessary litigation.

Tax collection has been one of the high points of FY 21-22, and has exceeded nominal growth. However, in the light of expected high nominal growth during FY 22-23, one expected more aggressive tax collection projection with higher buoyancy levels.

The introduction of digital currency and tax on digital assets have settled uncertainties around cryptocurrencies, which were unsettling to the entire banking system. Techies who have developed different crypto currencies can now redirect their talent to develop new technologies around blockchain to help fight the scourge of cyber threats.

Growth, a critical requirement to improve income levels, is the prime objective of this year’s budget. To pump up the economy to its prime, emphasis has been placed on Capex, a strategy that this government has followed since 2019. PM Gati Shakti lays emphasis on mobility related sectors and logistics. This will have a two fold impact. The investment in infrastructure would boost employment as well as growth in sectors such as steel, cement and construction. The completion of these projects would improve mobility in India, and data from the last two years has shown how mobility improvement provides an upward thrust on the economy. Another noteworthy thrust is the enhanced investment in road, rail, communication and warehousing sectors, and it will stimulate services that had taken a hit during the pandemic. In fact the choices were limited. Considering the demand compression, growth could only come from enhanced government spending and it was perhaps the only way. However, given that infrastructure projects are long term in nature and as “Amrit Kaal” objectives are listed out, private investment is the only way out in the medium term. For this, bond market development is critical and one was looking at some more initiatives in this area. Maybe, one has missed out in fine print, but level treatment of long term gain between equities and bonds is important for flow of funds in the infrastructure sector. 

It was heartening to see a pledge of 68 percent of defence procurement from domestic sources. This coupled with the part of R&D budget for weapon platforms to be routed through the Indian private sector will nurture the defence equipment supply chain in India. These steps have the potential to create large technology hubs in India, as well as trained technical man power is available domestically.

Besides public investment, reforms are the other leg that supports economic growth. Considering that subsidy reforms are not the most desirable at this stage, reforms to increase revenues need to be pushed further. In this context, few nuanced tax reforms are welcome steps. However, one would have also expected an emphasis on disinvestment, where major policy decisions have already been taken in the past. Further steps, whether legislative or administrative, need to be put in the spotlight through budget announcements to keep the momentum going. Looking at the macro picture, the fiscal deficit for the centre and states put together stands at 10.8 percent and general government debt stands at 88 percent of GDP. However, on disaggregation of receipts it appears that there are considerable upsides. Nominal growth at 11.2 percent is pegged a bit lower by 1-1.5 percent. This will give an additional 1-1.5 lakh crore in gross tax revenue. In disinvestment at 0.75 lakh crore, the estimates are a lot lower. If LIC IPO succeeds and BPCL and Container Corporation disinvestment go through, then non debt capital receipts would be much higher than projected. There is a potential of undershooting the fiscal deficit by 0.5-1%. Privatization of banks, if done, would further add to the receipts and give tailwinds to the reform process.

All in all, this budget has set clear long term goals and, in keeping with big Government globally, there are large dollops of spending on infrastructure to push growth. As inflation is contained globally, funding fiscal deficit through capital account surplus would be increasingly difficult. I see clear head room for lowering fiscal deficit and creating space for private borrowing. Privatization, asset monetization and borrowing programs would be the key items to be watched during the course of this year.

(Atanu Chakraborty is Chairman of HDFC Bank and Former Secretary of Department of Economic Affairs. The views expressed are author’s own.)