Budget 2022: Some musings

News: Recently, union budget 2022-23 has been presented. This article analyses the positives of the budget and suggest way forward to deal with the challenges.

What are the challenges currently faced by the economy?

This Budget is presented in an extremely challenging economic situation. Pandemic has disrupted the economy and it has not recovered completely from the shocks of the lockdown.

The fiscal deficit is widening and debt-GDP ratios is also growing with high unemployment and underemployment. The informal sector has suffered more, which reduced consumption. Also, private investment is not growing due to an uncertain global economic environment. This all calls for fiscal consolidation.

What are the positives of Budget 2022-23?

The budget has showed commitment to transparency with proper accounting of budget numbers. Also, the initiatives are continuing to help the most badly hit sections of society. There is also a major expansion of capital expenditure which will act as multiplier effect and help in strengthening medium-term growth potential.

Which issues are left unaddressed?

One, the government debt ratios are around 85-90 per cent of GDP but the budget has only promised a modest fiscal consolidation of 0.5 per cent of GDP.

Two, though, the special programs to assist the pandemic affected sections of the population have also been maintained. But there are no new taxes on the super-rich or any other significant tax-raising measures.

Three, also there are no marked reductions in protective Customs duty structure, which act against sustained growth of exports and successful global value chain participation.

What are the adverse consequences of a high fiscal deficit?

First, interest payments of the Centre have jumped by nearly 40 percent between 2020/21 and 2022/23. It is shrinking the share of non-interest expenditures from over 80 percent to just 76 percent.

Second, high deficits have increased market borrowings, which will pose serious monetary and debt management problems. This will increase inflation, which hurts the poor. Also, it will make exports less competitive and ultimately reduce economic growth. All this will increase the risk of crowding of private investment.

What are the signs of optimism currently visible for the economy?

First, the budget has shown conservatism in estimating revenues and expenditures have been exaggerated. It shows that government will have a sizable cash balance to reduce the market borrowings.

Second, due to “low base effects” because of Delta and Omicron in the several months of 2021-22, real GDP growth in 2022-23 can be around 7 percent and the GDP deflator is likely to be in the 6-7 per cent range.

This suggests that nominal GDP growth can be around 13-14 percent. Hence, net taxes of the Centre could be around Rs 0.7 trillion higher than estimated. That is why market borrowings will be Rs 2-3 trillion less than projected.

What is the way forward?

First, Budget Estimates can be affected by an unforeseen domestic or international shock. Hence, macroeconomic management is needed with lower fiscal deficits.

Second, trade policy reforms are needed to consolidate and strengthen the rebound in foreign trade.

Source: This post is based on the article “Budget 2022: Some musings” published in Business Standard on 10^th Feb 2022.