Finance Minister Nirmala Sitharaman was faced with the difficult choice of either clamping down on fiscal spending and halting the fledgling economic recovery, or continuing to spend while relying on over-burdened taxpayers to foot the bill. She chose neither option but yet managed to deliver a pro-growth Budget by choosing to borrow big time. Her total budgeted expenditure for FY22 (₹34.8-lakh crore) is pegged 14.4 per cent higher than the pre-pandemic Budget Estimates for FY21 and even exceeds the Revised Estimates for the year. With no material changes in tax rates (except for a few customs duty tweaks), fiscal deficit projections for both years significantly overshoot expectations. The government will be borrowing a whopping ₹12-lakh crore this fiscal, which is about the same as FY21. The government has chosen to bat on the front foot with respect to FRBM (Fiscal Responsibility and Budget Management) targets in this Budget — announcing its intent of returning to the recommended glidepath only by FY26. Convincing international rating agencies that India doesn’t deserve a ratings downgrade after this may prove an uphill task.
On the positive side, the Budget proposes to improve the quality of spends. Almost all the incremental expenditure is expected to fund capital outlays — with capital expenditure expected to expand 35 per cent in FY22 BE (Budget Estimates) against FY21 RE (Revised Estimates), while revenue outlays are expected to stay flat. It remains to be seen if the better mix is achieved in practice. Remedying the problem of budgets summarily ignoring health and education outcomes, substantial increases have been made in both areas. The usual populist giveaways to agriculture have been eschewed in favour of longer-term investments to improve urban amenities — piped drinking water, roads, public transport and waste management. As Covid-related distress has battered urban low-income earners far more than their rural counterparts, the reshuffling of priorities appears justified. On the flip side, most of these measures put the burden of economic recovery on the Government. Hopes for a private consumption revival or household savings boost have been dashed with no material changes to personal tax slabs or the 80C regime. The Budget also does not offer material triggers to rekindle animal spirits at India Inc. In fact, India Inc could well see its honeymoon on ultra-low borrowing costs end, with the massive borrowing programme for the second year running, threatening to crowd out private credit. Much will now depend on RBI playing the white knight to ‘manage’ market interest rates.
On revenues, the attempt to explore new sources of non-tax revenue instead of resorting to further doses of surcharge or cess needs to be commended. Though ambitious, the disinvestment target of ₹1.75-lakh crore does not appear unattainable, with a backlog of strategic sales (Air India, BPCL, Shipping Corporation, BEML) from the current fiscal. The LIC India IPO alone can contribute a significant chunk of this target. The idea of getting public sector entities in infrastructure to monetise their operating assets through a transfer to Invits, rendering them self-reliant on new projects is an excellent one. The proof of the pudding though will lie in the eating. The capital market has been wooed with a smattering of reforms — privatisation of PSU banks, increase in the insurance FDI limits and an ongoing bond purchase programme. The proposal to set up an asset reconstruction vehicle to take stressed assets off banks’ books, if it works, can free up bank lending to fund economic recovery. Similarly, the setting up of a specialised development financial institution for long-gestation project loans is positive for bankrolling the National Infrastructure Pipeline. But much will depend on how the new entity manages asset-liability mismatches and builds requisite project appraisal skills.
In the past, liberal assumptions on nominal GDP growth and tax buoyancy, apart from a tendency to keep a significant proportion of spends off-balance sheet diminished the credibility of the Budget numbers. This time around, an attempt has been made to remedy this. The nominal GDP growth assumption of 14.4 per cent factored into the deficit estimate is actually lower than the Economic Survey’s prediction of 15.4 per cent growth for FY22 and appears quite attainable. Similarly, revenue projections assume a 15 per cent growth in tax collections over depressed FY21 levels, realistically assuming low buoyancy in an economy just limping back from the pandemic. The move to impose a new Agriculture Infrastructure and Development Cess on some essential items including fuel, while neutralising the burden on the consumer through customs duty changes, may be seen as a sleight of hand though, as it transfers resources from the States to the Centre.