After Budget 2020 was blown apart in a couple of months by the onset of the coronavirus pandemic, Finance Minister Nirmala Sitharaman was fully prepared the next year, presenting a package focused on capital expenditure to pull the Indian economy out of the rut it found itself in.
The objective of the 2022 Budget–set to be presented on February 1–is not too dissimilar although some limiting factors have emerged.
"The upcoming budget faces acute policy trade-offs between nurturing a nascent growth recovery and diminishing fiscal space with challenging debt dynamics," noted Madhavi Arora, lead economist at Emkay Global Financial Services.
A combination of pandemic-related spending and a clean-up of its books saw the Union government's fiscal deficit balloon to 9.2 percent of gross domestic product (GDP) in fiscal year 2021.
While this allowed the Centre to target a sharp reduction in the deficit to 6.8 percent next year, a similar pullback is not expected in fiscal 2023.
According to a Moneycontrol survey of 10 economists, the Centre should meet its fiscal deficit target for fiscal 2022. And while some consolidation is expected in fiscal 2023, it is likely to be modest, with the median of economists' estimates suggesting the 2022 Budget will set a fiscal deficit target of 6.1 percent of GDP for the next financial year.
| ORGANISATION | FY22 FISCAL DEFICIT ESTIMATE (as % of GDP) | FY23 FISCAL DEFICIT ESTIMATE (as % of GDP) |
| Barclays | 7.1% | 6.5% |
| DBS Bank | 6.8% | 6.2% |
| Edelweiss Research | 6.8% | 6.5% |
| Emkay Global Financial Services | 6.8% | 6.2% |
| ICRA | 7.1% | 5.8% |
| India Ratings | 6.6% | 5.8-6.0% |
| L&T Financial Services | 6.9% | 6.0% |
| Morgan Stanley | 6.8% | 6.0% |
| Motilal Oswal Financial Services | 6.5% | 6.0% |
| State Bank of India | 6.8% | 6.3% |
"We believe that policymakers will favour a gradual consolidation, which will be premised on continued tax buoyancy as economic growth improves and reduction in pandemic-related increase in revenue spending,'' Morgan Stanley economists said in a report on January 18.
Aided by a favourable base effect, India's GDP is expected to grow 9.2 percent in fiscal 2022, decelerating to 7.6 percent in fiscal 2023, as per the Reserve Bank of India's (RBI) most recent survey of professional forecasters.
Revenue dynamics
The Centre's tax collections have improved remarkably in fiscal 2022, with gross tax collections in April-November 2021 up a massive 50.3 percent year-on-year thanks to a low base and the ongoing economic recovery.
On the whole, the Centre's receipts in the year could exceed the Budget estimate by as much as Rs 3 lakh crores. This would broadly match the net cash outgo as per the government's first and second supplementary demands for grants for the year.
However, fiscal 2023 will be an entirely different ballgame.
The 2022 Budget may assume nominal GDP growth of 12.8 percent for fiscal 2023, as per a Moenycontrol survey, down from the National Statistical Office's first advance estimate of 17.6 percent for fiscal 2022.
Wholesale Price Index inflation, which is used extensively in India's national income aggregates to deflate nominal price estimates and arrive at real price estimates, averaged 12.4 percent in April-December 2021, up from a mere 1.3 percent in fiscal 2021. Price pressures are expected to recede in fiscal 2023.
In addition, the excise duty cut for petrol and diesel, effected in November 2021, will see the government take a larger hit in FY23.
According to Barclays chief India economist Rahul Bajoria, the hit to the exchequer in November 2021-March 2022 from the excise duty cut will amount to Rs 48,400 crores. This is dwarfed by an estimated Rs 1.3-lakh-crore revenue loss for fiscal 2023. Still, overall net tax revenue for the central government is seen rising 8-13 percent next year.
If some buoyancy is missing from tax collections in the year, non-tax resources could provide a much-needed leg-up.
In addition to the annual bounty in the form of the Reserve Bank of India (RBI) dividend—which was a massive Rs 99,122 crores for a truncated, nine-month fiscal 2021 as the central bank shifted to a new financial year— the Centre's coffers are also likely to benefit from a raft of stake and asset sales.
"FY22 disinvestment receipts are unlikely to be anywhere close to the budgeted target, but if the LIC IPO, BPCL disinvestment, etc are undertaken in FY23, the government can rake in large resources," noted Edelweiss Research.
Also worth considering is the money that could flow in from 5G spectrum auctions and the National Monetisation Pipeline.
Pedal on spending
As has been the case for the last two years, the Centre will need to keep the spending pedal pressed in fiscal 2023, with the rural economy in particular needing impetus.
According to Motilal Oswal Financial Services, the agriculture sector's terms of trade are at their weakest since the mid-1990s because of input cost inflation exceeding output price inflation.
Indicators monitored by Motilal Oswal Financial Services suggest a sharp decline in the rural economy since mid-2021, with more recent data pointing to a continued deterioration in October-November 2021.
"Although a part of this weakness is certainly due to the base effect, the upcoming assembly elections in five states, including Uttar Pradesh and Punjab, suggest that the government may be tempted to support the frail rural economy," Motilal Oswal Financial Services said in a report on January 19.
While the Uttar Pradesh polls will be held over seven phases starting on February 10, Goa and Uttarakhand will vote on February 14, with Punjab on February 20. Assembly elections in Manipur will be held over two phases on February 27 and March 3.
The rural economy apart, the 2022 Budget's focus will be very much on the revival of private investment and job creation. This is likely to be done through a continued focus on capital expenditure.
"We expect revenue spends to also rise, but the quantum of support for pandemic-specific programs might be rolled back to make room for higher capex spends and consolidate the book," said Radhika Rao, senior economist at DBS Bank.
On the whole, the challenge for the 2022 Budget will lie not so much in how much fiscal consolidation it proposes but how effectively it is able to ignite India’s growth engines and reduce the economy's dependence on the government.
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