budget 2022: Tightrope walk: Govt needs to balance growth support & fiscal prudence this Budget

Union Budgets in India are considered special. While, they are just a statement of accounts, they do provide insights on governments’ economic roadmap, and what funds can realistically be absorbed for capital expenditure and infrastructure spending, to help fuel the investment cycle, create employment opportunities and improve domestic demand, while rationalising centrally-sponsored schemes and central sector schemes to further improve the quality/efficiency of expenditures.

Macroeconomic backdrop: More complex this time around

Last year, the Union Budget had taken place in the backdrop of COVID-19 being still around (although vaccines had been approved), surging commodity prices and accommodative policymakers around the world. Hence, policymakers did the right thing by expanding fiscal deficit to support growth. They had also very conservatively forecast FY22’s tax revenues. This, along with rising inflation (especially producer prices), is likely to result in FY22 tax revenues overshooting budget estimates by 15-20 per cent, more than offsetting divestment shortfall.

However, for FY23, the environment is more complex. First, economic recovery is still narrow and nascent, with India’s FY22 real GDP being just 5 per cent above FY19 levels, implying a 3Y CAGR of sub 2 per cent. Also, there seems to be deceleration in domestic demand in recent months as seen by weak IIP (despite strong exports), subdued auto sales and weak cement production. Thus, clearly fiscal support is warranted.

The challenge is that unlike FY22, nominal GDP and inflation is likely to moderate in FY23. This along with excise duty cuts may result in tax revenues being less buoyant. Divestment, thus, becomes very important to fund spending. Further, unlike last year globally policy support is being withdrawn and to that extent it lowers Indian policymakers’ elbow room to remain accommodative.

Finally, the government has been trying to get India included in global bond indices. This warrants fiscal conservatism. Hence, to that extent this time around policymakers are walking a tightrope between supporting growth and being fiscally prudent. To that extent, some consolidation should happen but a large one may not be warranted as it could weigh on nascent economic recovery.

Rural economy could be back in focus

On the expenditure part, the slowdown in recent months has been more in rural and urban bottom of the pyramid. This is perhaps owing to slower revival in services jobs and also a sharp scale-back in government spending towards rural economy. In fact, in the first eight months of FY22, spending towards rural has contracted by 25 per cent year-on-year.

Thus, in the forthcoming budget, higher allocations for the rural economy is warranted. Also, with 2022 being a politically important year with large state elections, a rural tilt is more suitable politically as well. So overall, a rural tilt is good economics as well as good politics.

Infra: More clarity on financing of national investment infrastructure pipeline

While the rural economy is likely to become a key spending area, it does leave the government with lower resources for spending on infrastructure. However, spending on infrastructure is very critical for making India a manufacturing hub as well as for creating jobs. Hence, other sources of financing the same will need to be tapped.

Last year, the government laid out its National infrastructure investment pipeline plan with a blueprint containing modes of financing as well. Within it, asset monetisation was one of the key aspects. Some measures to expedite the process and incentivise foreign capital can go a long way. It’s worth noting that despite the hawkish Fed, real rates are negative globally and in such a scenario assets with healthy cashflows can attract a lot of financing from foreign investors.

Apart from it, allocating more funds to National investment infrastructure fund, setting up development finance institute (DFI) can help in improving the national infrastructure financing.

Manufacturing: Increased allocations for PLI and rationalising import duties

For manufacturing, the government in recent years has introduced the production linked incentives (PLI) scheme and has been rationalising duties. We think that going ahead as well this is likely to continue. However, increased allocations for PLI and rolling it out to support more sectors can provide more impetus to manufacturing. Apart from that, rationalizing of inverted import duty structure has been a running theme for sometime and should continue going ahead as well.

Urban economy: Support for MSMEs and some ways of income transfer for urban households

Apart from the rural economy, even the urban middle class has been hit quite severely by the pandemic. Especially the smaller businesses/MSMEs. In order to support them, government has introduced the ECLGS scheme where there is 100% guarantee for loans given to MSMEs. However, despite strong interest by banks, offtake has been much less than what has been allocated. This may perhaps be due to already high indebtedness of MSMEs which is leading to lower interest from borrowers.

Hence, measure with perhaps more interest subsidy, lesser stringency could help increase credit flow to MSMEs. Given that they account for more than 60 per cent of non-farm jobs, a revival of MSMEs is extremely critical for a healthy labour market.

Apart from MSMEs, some ways to transfer to urban households could also help. Income transfer could come through a) direct tax cuts, b) Indirect tax cuts – like the recent oil tax can help support consumption, c) Increased incentives for real estate purchases or d) A new urban employment guarantee scheme on the lines of MNREGA can also help in employment and boosting sentiments.

Conclusion: Fiscal situation more challenged this time

Thus, the overall fiscal situation is more complicated this time around. Growth needs support, but fiscal profligacy must be avoided, making the Finance Minister’s position unenviable. Thus, the government, while using their balance sheet resources to support rural and urban consumption, must rely on off-balance sheet resources to fund infrastructure. Apart from that, measures for improving business climate, more medium term plan for manufacturing and infrastructure and a fiscal roadmap could be on the anvil.


(Shiv Sehgal is President & Head Institutional Clients Group, Edelweiss Financial Services)