Finance Minister Nirmala Sitharaman, who is set to deliver her fourth consecutive Budget speech on Tuesday, is faced with a tough balancing act between consolidating on the economic recovery seen in the current fiscal post pandemic and charting a credible roadmap for fiscal consolidation in keeping with the promise made last year of taking fiscal deficit to 4.5 per cent of GDP by 2025-2026. 

This is going to be a big ask given that India is still not out of the pandemic woods and the effect of the recent Omicron variant of the virus, which had brought upon the third wave, is yet to subside. Also the fiscal math has been made tough by the recent surge in global crude oil prices that is now hovering around $90 per barrel mark and is poised to cross the $100-mark this year.

Economic growth

Sitharaman has to ensure that the rebound seen in the corporate sector in 2021-22, which led to a strong growth in tax revenues, is sustained in 2022-23 as well. The only problem is that the tailwind of nominal economic growth of 18 per cent that one is seeing this fiscal as against the 14 per cent growth budgeted may not repeat itself next year (2022-23). 

Between pushing for economic growth and fiscal consolidation, the Finance Minister — especially with Assembly polls of five States round the corner — is widely expected to choose the former as the thrust of the Budget and deliver another hugely expansionary one this year too, when the country is battling a third wave of the coronavirus pandemic, say economy watchers.

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So, the Centre is unlikely to maintain tight purse strings but may not still turn the Budget into a populist one. There is all likelihood that most direct tax rates — corporate and personal —will be kept on hold at the same level but some tinkering such as extension of the tax slabs or enhancement of standard deduction for salaried class may come about to assuage the concerns of the middle class.

Remember that the Centre’s budgeted capex spend went up a whopping 26 per cent for the current fiscal at ₹5.54-lakh crore. Don’t be surprised that the public investment budget goes up the same level for next year (2022-23), they said. But Budget making this year is going to be even more challenging given the backdrop of extraordinary uncertainty around the world and recent talk of disrupted recovery.

Different situation

Unlike last year (2021 Budget), when she just had to spend her way out of trouble to offset the impact of the pandemic, the situation this year round is entirely different, say economy watchers.

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Sitharaman’s fourth Budget speech will come when the global recovery is set to decelerate markedly — as pointed out by the World Bank’s flagship publication Global Economic Prospects report — and the rising inflation has forced central banks across the world to start tightening monetary policy and drain liquidity (in the global financial system) that supported asset values. Already, the IMF has scaled down its India growth forecast for 2021-22 to 9 per cent from 9.5 per cent projected earlier. This has been done in the wake of Omicron impact, reimposed mobility restrictions and increase in petrol and energy prices.

Where are the pockets?

In the Indian context, while top corporates are doing well with strong earnings growth, a large part of the middle class and informal sector are still struggling to cope with the income losses due to pandemic-induced job losses in the economy. Not only is rising inflation a problem, the most important point is falling consumption demand, especially in rural areas. This may prompt Sitharaman to enhance the allocation to government schemes like MGNREGA to boost the growth engine in the economy and thereby reduce inequality in the society.

Although faced with a tight fiscal situation, Sitharaman is expected to deliver a Budget that, while meeting current year’s fiscal deficit target of 6.8 per cent, will target a deficit of modest improvement of 6.5 per cent for 2022-23. So if you are a fiscal hawk, you may end up balking at the expenditure increase that is likely to happen. Elevated expenditure will, for yet another year, keep the fiscal deficit wider than 6 per cent of GDP.

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Simply put, spending will be stopped up on infrastructure projects, health care so as to generate employment and pull people out of poverty.

To address the concerns of funding the growing fiscal gap, Sitharaman is widely expected to tweak income tax rules to boost foreign investors demand for India’s sovereign debt. This is expected to help India gain entry into global bond indices and thereby pave the way for an additional annual $30-40 billion to come into India from 2023 onwards. This may also create some space for reduced government borrowing and allow RBI to wind back its pandemic induced monetary stimulus.

Green finance

Given India’s ambitious commitment to become Net Zero by 2070, the Budget may spell out a roadmap for green-shifting the current real economy industries. Budget may, therefore, open the doors for new age financing instruments like sovereign green bonds and sustainability financing instruments so as to give a major push to green-finance in the days to come.