Union Budget 2022: Third Budget under the shadow of the pandemic

Read also: Economic Survey 2022: Live updates

“While volatility in micro-indicators is here to stay with evolving pandemic conditions as well as a global economic development, for India there is need to focus on medium-term growth and development prospects,” NR Bhanumurthy, vice-chancellor of BR Ambedkar School of Economics in Bengaluru, told Moneycontrol.

Happily for India, which has been in an economic mess for the past two years – and even before the coronavirus came to occupy centre stage – the economy has rebounded after the second Covid wave.

Even more significant, the government’s finances on the eve of the budget are in relatively good shape. Tax revenue has been buoyant, partly the result of very high nominal GDP growth of 23.9 percent in the first half of the current financial year.

Tax buoyancy

Add to it the distinctly healthier balance sheets of the corporate and banking sectors as compared to the immediate past.

“With a palpable buoyancy in tax collections, we expect the government’s gross tax receipts to overshoot the budgeted amount by a healthy Rs 2.5 lakh crore in FY22,” said Aditi Nayar, chief economist at ICRA.

Even as the potential devastation of the Omicron variant is evaluated, February 1 is clearly the red letter day.

The Union Budget for FY23 will essentially focus on demand generation, job creation, public healthcare, hand-holding micro, small and medium enterprises and enabling the economy to regain the lost thrust of ideal double-digit growth. There will be provisions for economic revival, besides boosting consumption and production capacity.

The point is how do you do all this? According to Bhanumurthy, the budget could be an opportunity to focus on a medium-term perspective in terms of growth and emerging development issues.

In Bhanumurthy’s estimate, these include potential GDP growth, achieving $5 trillion economy status, growing public debt, rising unemployment and inequality, achieving the Sustainable Development Goals (SDGs), and growing inflationary pressures, among others.

“While recent data as well as some leading indicators do suggest a decent recovery, there are apprehensions with respect to sustainability of these numbers. This is more so when Covid-19 and its new variants are still wrecking the global economy,” Bhanumurthy said.

To propel growth, investments should be leveraged with offering relief to key sectors – housing & infrastructure, energy, agriculture and food processing, pharmaceuticals, healthcare, education & skill development, automobiles, tourism, civil aviation, hospitality, information technology & information technology enabled services, banking, financial services and insurance, financing growth and sustainability, manufacturing competitiveness, strengthening MSMEs, supporting exports, technology and research & development.

Rural schemes

In the backdrop of the withdrawal of the three Central farm laws after a year-long protest, it is to be seen what provisions in the budget will project the Modi government as pro-farmer.

According to Nayar, macro-economic uncertainty could linger on account of the potential emergence of new mutations of the Covid-19 virus, which may necessitate additional spending by way of extension of the free food grains scheme and higher spending on offering rural jobs under the Mahatma Gandhi National Rural Employment Guarantee Act.

“First, a likely distribution of free food grains for a period of six months under the Pradhan Mantri Garib Kalyan Anna Yojana could cost Rs 90,000 crore, while spending on the MGNREGA to support the rural economy could necessitate an additional outlay of Rs 30,000 crore over and above our baseline estimate. Given this backdrop, the government’s ability to cement higher growth in direct taxes and garner disinvestment receipts would play a critical role in determining the extent of the fiscal consolidation that is feasible in FY23,” Nayar said.

Experts agree that most – if not all – of the finance minister’s challenges will be a tightrope walk between fiscal expansionism and fiscal prudence.

Since the pandemic, the Modi government has offered several fiscal stimulus packages to industries. As a result, India’s fiscal deficit is projected to widen to 7.5 per cent of GDP in this financial year, against the budget estimate of 6.8 percent for the year.

Enacted in 2003, the Fiscal Responsibility and Budget Management Act originally set targets for the government to limit the fiscal deficit to 3 percent of GDP by March 31, 2021, and Central government debt to 40 per cent of GDP by 2024-25.

“While the FRBM Act of 2003 suggests targets on fiscal deficit, revenue deficit as well as on the public debt, the amended act of 2018 drops the revenue deficit as a target while retaining the other two targets,” said Bhanumurthy. “As we have undertaken studies for the last three Central Finance Commissions and especially on the macro-fiscal frameworks, we can confidently suggest that all the three targets in the 2003 Act are internally consistent and at the same time ensure decent and sustainable GDP growth.”

However, the FRBM Act allows invoking an escape clause in situations of calamity and national security. In such situations, the government can deviate from its annual fiscal deficit target – as it most probably will.

Expenditure

On the SDGs, while there are initiatives by both the Centre and many state governments, the crucial aspect of allocating more resources to SDG sectors and focusing on improving efficiencies of such expenditure appears to have taken a backseat.

Pointing out the sluggish performance of capital expenditure by Central ministries, Sitharaman had asked them for a course correction in December. The railways had spent only 61 percent, the power ministry 7 percent, atomic energy 50 percent, department of space 45 percent, telecom 12 percent, housing & urban affairs 54 percent, health and family welfare 48 percent, communications 49 percent and electronics & IT, 29 percent.

Since Independence, India has followed cash-based accounting. It is time for India to change to accrual-based accounting. Why? Cash basis is, without doubt, easier to operate, but accrual accounting portrays a more accurate portrait of the fiscal position.

In accrual-based accounting, revenue and expenditure are recorded when it is earned or incurred, irrespective of when the cash is actually paid or received. In cash-based accounting, books are prepared wholly based on cashflows.

There has been a longstanding demand that capital gains taxes – both long-term and short-term – should be aligned and simplified. Currently, long-term capital gains are taxed at different rates for different holding periods. Long-term capital gains on foreign equities should get the same treatment that domestic equity investments enjoy.

This will also pave the way for greater inflow of global investments. Today, foreign investments must be held for 24 months to be deemed long term and capital gains are taxed at 20 percent compared with the one-year holding period and a 10 percent rate on domestic equities.

As the ghost of retail inflation haunts India at regular intervals, there is a strong case for bringing petroleum under the goods and services tax regime. However, this hasn’t happened because no state is willing to accept this shift.

States earned Rs 2.02 lakh crore from taxing petroleum products, while the Centre earned double that amount during 2021. Placing petroleum products under GST would mean loss of revenue for both the Centre and the states.

It may not be a bad idea to put petroleum goods in the top GST slab of 28 percent and enable the Centre and states – through a constitutional amendment, if needed – to levy carbon taxes that would act as a flexible source of revenue over and above GST. This would improve the GST structure and allow states to retain revenue flexibility till they are more comfortable with GST and the carbon taxes can be rationalised.

Surcharge and cess

It’s time to get rid of surcharges and cess on income tax, which should be imposed only in an emergency such as a war or a pandemic. The surcharges and cess can be eased in a time-bound manner.

Ease of doing business and compliance should be made smoother as India’s pursuit is to maintain its edge as a prominent global economy and further enhance its position.