This budget places an aggressive fiscal bet on growth
Premium- It has done well with its growth orientation in 2022-23 and efforts to lay a foundation for the future
Is it possible to have a lower fiscal deficit, provide for a large fiscal stimulus, be generous with subsidies and anti-poverty programmes, and yet please our financial markets, i.e. for both bonds and stocks? This sounds like an impossible task, sort of like squaring the circle. Yet, the answer to the question above is not an unqualified ‘no’.
If indeed the growth impulses in the Indian economy are robust, and there are upside surprises, then the high tide of economic growth should lift all boats. That may indeed be happening globally, as two of the largest economies, the US and China, will record growth rates of over 5% in 2022. This means that exporting nations will benefit from that high tide. India’s exports have already clocked very impressive growth this year. And India’s economy will also be the fastest-growing among its peers, as per the International Monetary Fund. In the current fiscal year, India’s nominal gross domestic product (GDP) has grown 3% more than what was anticipated in last February’s budget. Even gross tax revenues have been higher by ₹3 trillion, thanks to better-than- expected corporate profits, buoyant goods and services tax (GST) collections and better compliance. All this is part of the good news. But despite the tax revenue bonanza, the fiscal deficit achieved did not improve much, due to higher-then-planned spending, mostly necessitated by the pandemic. For instance, the allocation for India’s rural employment guarantee programme had to be raised. And secondly, free foodgrain distribution had to be extended more than once, and has eventually cost the central exchequer ₹2.6 trillion. Of course, this helped prevent a food crisis, and cannot be quibbled with. But it is telling that when the economy is among the fastest-growing in the world, it is still necessary to provide free foodgrain to around 800 million citizens. This points to the widening chasm between the rich and the poor, apart from the depressed job prospects that people face.
As the economy is picking up growth momentum, and tax collections promise to stay buoyant, there was some expectation that fiscal consolidation would be sharper than what has been presented. Finance minister Nirmala Sitharaman has aimed for a fiscal deficit of 6.4% of GDP, about 0.4% more than what markets were expecting. Given that nominal GDP could be around ₹260 trillion, this implies a very high quantum of borrowing from savers in the economy, as high as ₹15 trillion of gross borrowing from the market. This might soak up most of the domestic economy’s financial savings, and we may have to turn to foreign inflows. Those flows were robust this year, and hopefully will continue to be so next year. India’s rupee sovereign bonds were expected to be included in global bond indices, which would have attracted even higher inflows from abroad. But that needed a crucial tax amendment, which does not seem to have been proposed in the latest budget. A new idea, that of green sovereign bonds, has been mooted, and that too might attract more flows from abroad. However, given the Centre’s higher-than-expected borrowing requirement, long-term interest rates will go up. This will be exacerbated by the liquidity tightening that is imminent in the US, due to raging inflation amid a surge in demand there. What makes matters even more complicated is a spike in the global oil price, partly caused by the geopolitical flashpoints of Ukraine and Taiwan.
Hence, the main theme is that the budget represents an aggressive fiscal bet on high growth. Thankfully, the extra fiscal spending is almost wholly focused on capital spending: i.e. on roadways, railway, ports, airports and so on, which will spur growth in the future. Total public spending on infrastructure could reach 3% of GDP, which would go a long way in sustaining long-term growth. This also has the potential to crowd-in rather than crowd-out private capital spending. An important consideration is that the government needs to beef up capacity to execute large capital expenditure projects (i.e. their tendering, contracting aspects) worth nearly ₹20 trillion annually, as envisaged for the National Infrastructure Pipeline. Apart from capital expenditure, exports too could prove to be an important driver of economic growth, as outdated Special Economic Zone policies are to be revamped. The fact that some input duties have been brought down to enable the global competitiveness of some domestic industries bodes well for the government’s ‘Make in India’ initiative and participation in global value chains.
This budget offers a nod to the increasing importance of crypto assets, which have been brought under the tax net. The introduction of a blockchain-based digital central bank currency in 2022-23 will make India one of the very few countries in the world to do so. It will give a huge boost to talent in the fast-emerging fields of cryptography and fintech. Initiatives like drones as a service, a national policy for EV-battery swapping and ambitious targets for renewable energy all speak of an aspirational, future-focused development policy.
The budget speech made several references to India at 100, thus giving a long-term flavour to policy thinking. Many policy initiatives and reforms—such as labour, tax, financial sector and bankruptcy reforms— take several years and often many electoral cycles to become effective. So, a longer term outlook and stable tax policies are what were needed. And on this point, the budget has done admirably.
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