The Union Finance Minister had the unenviable task of formulating the budget at a time when the economy required a lot of fiscal stimuli for revival, but this had to be done with limited fiscal space. Virtually all the growth engines except exports have been stuttering. The pandemic has reduced both income and private consumption levels.
Fast-tracking public investment was constrained by limited fiscal space and private investment is yet to revive.
The advanced western countries are in the process of tightening their monetary policies and the Reserve Bank of India has spent much of its firepower and is in the process of draining liquidity. Elevated crude oil prices impart additional concerns of imported inflation.
Taking all these factors into consideration, heavy-lifting of the economy had to be undertaken in the budget. Admittedly, the Finance Minister has done a fine balancing act in the budget between providing fiscal stimulus through increased capital expenditure and containing the fiscal deficit.
The most notable feature of the budget for 2022-23 is the significant increase in capital expenditures to 2.9% of gross domestic product as against the revised estimate of 2.6% in the current year. The budget projects a reduction of the fiscal deficit to 6.4% of GDP. Of course, the budgeted deficit is higher than the adjustment path recommended by the 15th Finance Commission.
The Commission, under a slow recovery scenario, had recommended the deficit for FY23 at 5.5% of GDP, but the Finance Minister has promised to increase the adjustment in the coming years to contain it at 4.5% by 2025-26 as recommended by the Commission. In the given situation of faltering growth, perhaps, that is unavoidable.
Capex Outlay: Looking Under The Hood
The capital expenditure outlay in the budget has been increased from Rs 6 lakh crore in 2021-22 to Rs 7.5 lakh crore. A closer look at the numbers shows that the major increase in capital expenditure is the fifty-year interest-free loan of Rs 1 lakh crore to be advanced to the states for the development of infrastructure. This is in addition to the normal borrowings allowed to the states. Since this is a loan advanced to the states, it does not add to the fiscal deficit of the centre.
The only other major sectors where the outlay has been increased are Railways (Rs 30,000 crore) and Roads (Rs 66,494 crore). Although the Finance Minister in her budget speech mentioned the allocation of Rs 60,000 crore to drinking water and Rs 48,000 crore for affordable housing schemes, these are absolute numbers, and the actual increase is much lower. Moreover, these are centrally-sponsored schemes and are shown as revenue expenditures.
So, the high-point in increasing capital expenditure is the interest-free loan advanced to states, and the actual increase by the central government is not substantial except in railways and road transport.
Nevertheless, to the extent there are increases, they will help in accelerating growth and creating employment.
Financing The Spending: Revenues And Cutbacks
How will these increases in capital expenditures be financed? Interestingly, the revenue projections are conservative. Total revenue receipts are estimated to increase by just 6% over the revised estimate of the previous year. This is partly due to the high-base figures as the revised estimate for 2021-22 is higher than the budget estimate by 6.4%. In other words, as compared to the budget estimate for FY22, the budget estimate for FY23 is higher by 23.2%. The net of devolution tax revenue is budgeted to increase by 9.6%, and as compared to the budget estimate of last year, the increase works out to 25.2%. When the economy reaches full capacity there is no reason to presume that the revenue buoyancy assumed is unrealistic and if anything, the estimates look conservative. In fact, the non-tax revenues are budgeted to decline even in absolute terms by 14% mainly due to lower estimated dividends from the public sector enterprises and the Reserve Bank of India.
On disinvestment proceeds, as against the budgeted Rs 1.75 lakh crore in 2021-22, the revised estimate is placed at Rs 78,000 crore and for the next year, it is budgeted at Rs 65,000 crore.
Thus, the revenue projections look realistic.
In particular, the total subsidy bill for FY23 is budgeted lower by Rs 1.32 lakh crore from the revised estimate of FY22, which includes a lower food subsidy of Rs 79,838 crore and lower fertiliser subsidy of Rs, 34,900 crore. It remains to be seen whether the government will be able to restrict the revenue expenditures at the budgeted level. Of course, reductions in these subsidies are desirable, and if the government sticks to the budgeted numbers that will be a significant improvement in expenditure allocation.
There are no major changes in the tax structure proposed in the budget. Perhaps the most important measure is the levy of the tax on transactions in virtual digital assets with 1% deducted at the source, the extension of tax incentive for the startups by one year, and the extension of the availing concessional tax for the new entities up to March 31, 2024. It has been proposed to levy the surcharge on long terms capital gains uniformly at 15% for all types of capital assets. The budget has also introduced some measures to reduce the compliance burden and encourage voluntary compliance. However, the disappointing feature is the continuation of the protectionist trend and continued differentiation in import duties.
M Govinda Rao is Councillor, Takshashila Institution. He is a former director of the NIPFP, and a Member of the 14th Finance Commission, and presently the Chief Economic Adviser at Brickwork Ratings. Views are personal.
The views expressed here are those of the author, and do not necessarily represent the views of BloombergQuint or its editorial team.
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