Opinion

Coming, a Budget for consolidation

Madan Sabnavis | Updated on: Jan 25, 2022
The Budget may not be able to raise capital expenditure in a big way

The Budget may not be able to raise capital expenditure in a big way | Photo Credit: RAJU V

There is little room for any kind of largesse, and sector-specific demands are unlikely to be part of the Budget as there would be severe constraints in increasing expenditure

It may sound clichéd to say that the Union Budget will be more important this year, because this is so every time it is presented. FY23 will be different because it will be the start of a new era for the economy where even a possible fourth wave will have less of a negative impact in the form of lockdowns than the earlier ones. The country is better prepared to face these waves as a large part of the population is vaccinated and the governments know how not to debilitate economic activity.

The Budget is actually an income and expenditure statement of the government but has evolved to become a comprehensive policy document where every constituency has something to demand. Therefore the pressures on the Finance Minister are several and balancing these demands with the inherent constraints of any income-expenditure statement is the challenge.

The government has acted responsibly even during the pandemic and while the fiscal deficit ratio did overshoot in FY 21 by 6 per cent to reach 9.5 per cent of GDP, it was caused by a combination of sharp fall in revenue receipts and higher outlay on necessary relief expenses. There were otherwise few freebies given through tax cuts to the public.

Glide path

The new FRBM norms talk of the glide path to 4.5 per cent fiscal deficit ratio by FY26. This means that beginning from 6.8 per cent targeted for FY22, there has to be a reduction gradually by at least 0.5 per cent of GDP every year so that this target can be achieved. Therefore this would be the starting point of the exercise and even if pegged to 6 per cent would mean a deficit of ₹15.5-15.75-lakh crore, which will be slightly higher than that budgeted for FY22 at ₹15.06-lakh crore.

This indicates the intensity of the borrowing programme of the government which will remain high for sure. This is the first number to look out for which will also set the boundary within which the government has to operate.

The assumption of GDP growth is important because this becomes the basis for conjectures on tax revenue. GDP growth of 13 per cent looks likely to be assumed which takes in both real GDP growth as well as inflation. The crux will be on consumption increasing in tandem as GST has a share of 28-30 per cent in total tax revenue.

The wild card will once again be disinvestment on the revenue side. In FY22, ₹1.75-lakh crore was targeted and it is still not sure if the big ticket of LIC will go through. If LIC goes through this year, then this amount will not be available for FY23 as there are no other big tickets that can garner such an amount.

The two public sector banks (PSBs) which the government spoke of will not materialise this year which means that it can be pushed to FY23. Therefore, successful LIC disinvestment will mean a lower amount for FY23 which has to be in the region of ₹75,000-8000 crore assuming the two PSBs and BPCL materialise. With this amount coming down the scope for expenditure will also reduce correspondingly by ₹1 lakh crore.

Expenditure targets and programmes have to hence be planned once the fiscal deficit number is fixed which will be based on a GDP growth number and the disinvestment target. On the expenditure side, too, there are issues. If one looks at the total expenditure of ₹34.8 lakh crore in FY22, the big tickets included were interest payments (₹8.1-lakh crore), defence (₹3.5-lakh crore), subsidy (₹3.4-lakh crore), and pension (₹ 1.9 lakh crore).

These four heads account for 48 per cent of the total budget and are in a way permanent expenses. There is further a committed expense of ₹2.6-lakh crore for salaries which get allocated across various ministries and ₹2.9-lakh crore of transfers to States to carry out certain centrally sponsored schemes. Therefore, around 64 per cent of the budget cannot really be cut in a significant manner.

With 35 per cent of funds available now for allocation, it is a case of balancing out priorities and this is where the government has to take a realistic call. Rural and health are two inescapable expenses and these were around 7-8 per cent of the budget last year. Given that health will continue to dominate during this year with the talks of a booster vaccine being administered to all the people, higher allocations would be required for this purpose.

Ever since the government launched the PM Kisan scheme, which provides cash transfer to a large section of farmers, with a ticket size of ₹65,000 crore, it intuitively cannot be reversed or terminated. Therefore another 1.8 per cent gets caught up in the committed sphere. The call to be taken will be on relief expenditure and whether the free food plan would be extended into FY23.

Therefore practically speaking there would be severe constraints in terms of increasing expenditure in any specific area. The usual argument put forward by economists is to increase capex as this has multiplier effects on the economy in terms of creating jobs and income and hence consumption with a lag. Here, too, the pattern so far is quite interesting. In FY22, the government has targeted ₹5.54-lakh crore of capex.

Within this segment, defence has a claim of ₹1.35-lakh crore which is almost 24 per cent of total. Another 44 per cent goes to roads and railways (₹1.08-lakh each) and urban development (₹0.25-lakh crore). Around 14 per cent goes as capital assistance to lending institutions and transfer for the National Infrastructure Pipeline. Given this structure of capex, at a practical level an increase of not more than 10 per cent can really be expected.

All this means that we must be moderate in our expectations. Sector-specific demands are unlikely to be part of the Budget. The vulnerable sectors could be included under the ECLGS of the government and SMEs and start-ups would continue to be focus points in terms of clearances, payments and credit. There could be some minor benefits to individuals on the tax front as there is little room for any kind of largesse. This will be more of a consolidation Budget which, ultimately, makes the task easier.

The writer is Chief Economist, Bank of Baroda. Views are personal

Published on January 21, 2022
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