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Centre’s 2022-23 Budget introduces a number of key structural changes. First, it accords a clear higher priority to capital expenditure in total expenditure. Second, within the composition of capital expenditure, it provides greater emphasis on non-defence capital outlay. These structural changes if maintained over the medium-term, would lead to a sustained growth of which 2022-23 is the first normal post-Covid year.
Growth prospects
The Budget gives only one growth number which pertains to nominal GDP growth. The estimated growth in 2022-23 over 2021-22 at current prices is 11.1 per cent. If this is juxtaposed with the real GDP growth for 2022-23 of 8-8.5 per cent, the implicit price deflator (IPD)-based inflation can be estimated at 2.9 per cent for which the lower end of 8 per cent real growth has been used. This is a sharp reduction in the IPD-based inflation rate of 7.7 per cent in 2021-22. This high inflation has been driven by global supply-side pressures and high global prices of crude and primary products. There are no signs of these pressures abating in the near future. As such, the pressure from imported inflation may continue on WPI as well as IPD-based inflation. Thus, a sharp reduction implied in the Budget numbers appears to be an underassessment. There is one more dimension of such an underassessment pertaining to Centre’s gross tax revenue buoyancy.
Tax performance and outlook
Centre’s gross tax revenues grew by 24.1 per cent in 2021-22 with a buoyancy of 1.4. This sharp upsurge in tax revenue growth is the product of nominal GDP growth and the tax buoyancy. The increase in tax buoyancy is largely due to the better performance of direct taxes in 2021-22 which grew by 32.3 per cent. The improvement in direct tax buoyancy to a significant extent, is due to the augmentation of the formalization and digitisation of the economy particularly the corporate sector and the personal income tax assessees. Based on these qualitative changes, it would be reasonable to expect a sustained buoyancy which is higher than 0.9 assumed in the Budget. Thus, there is scope for creating additional fiscal space both due to higher than assumed nominal GDP growth and buoyancy. This may come in handy for some of the likely under-provisions in the revenue expenditure budget including the major subsidies which are budgeted to contract in nominal terms. These may go up since these are largely linked to global crude prices.
Structure of expenditure
The most notable feature of the Budget is the changed structure of government expenditure in favour of capital expenditure. In fact, growth in capital expenditure at 24.5 per cent in 2022-23 is significantly higher than the corresponding growth of 0.9 per cent in revenue expenditure. This also implicitly improves the quality of fiscal deficit since a much higher proportion of 45.2 per cent of fiscal deficit is now earmarked for capital expenditure in 2022-23. Within capital expenditure, capital outlay is also structured in favour of non-defence expenditure which has a higher multiplier effect. On the expenditure side however, total expenditure is budgeted to grow only by 4.6 per cent in 2022-23. This may have to be augmented in order to make this Budget more genuinely stimulating from the fiscal side.
Debt and step-wise reduction in fiscal deficit
Centre’s debt is estimated at 59.0 per cent of GDP at the end of 2022-23. The FRBM target as per the 2018 amendment is 40 per cent. The path of downward adjustment to fill this gap of 19 per cent points depends on the profile of fiscal deficit, nominal GDP growth and the effective interest rate. The interest rate determines the ratio of interest payments to revenue receipts. This would remain under pressure as long as the debt-GDP ratio is high. In fact, domestic interest rates may be pushed up due to global pressures also as money is flowing back to the US and other developed countries as their interest rates have been increasing. A careful calibration of the fiscal consolidation path in the medium term as well as in the long term is called for as part of a reliable fiscal strategy. There is possibly a need to constitute a new FRBM Committee as suggested by the Fifteenth Finance Commission.
Views expressed are personal.
Author is the Chief Policy Advisor, EY India and formerly Director, Madras School of Economics
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