PremiumFinance minister Nirmala Sitharaman has done a decent job with Union budget 2022-23. It proposes to spend 15.3% of GDP, borrowing 6.4% of GDP to finance that expenditure. In other words, 42% of the total expenditure would be financed by debt. The quiet dropping of '$5 trillion economy' from the discourse, and the adoption of India’s Independence centenary as the fulcrum of ambitious goals is to be appreciated as clever politics, rather than dismissed as chicanery.
Budgets are best assessed based on their ability to address immediate and long-term needs of the economy, their tax proposals, by the total expenditure and by the fiscal deficit, and less by the grand announcements made along with them. These announcements do not really need the budget as an occasion to be made, nor does the budget finance a major part of such announcements, the Gati Shakti logistics plan being a prime case in point.
One immediate need of the economy the budget does not quite address is the distress pandemic-hit sectors of the economy and the people dependent on these sectors experience. Unless the budget’s stab at investment-led growth succeeds on a scale large enough to alleviate this suffering, large swathes of the populace would be left with reduced consumption. The budget has few explicit schemes for extended relief, although the outlay on centrally sponsored schemes is slated to go up. The outlay on subsidies comes down from 9% of the budget in 2021-22 to 8% in 2022-23.
The room for fresh tax proposals is limited, given the handing over of decision-making on the bulk of tax receipts to the Goods and Services Tax (GST) Council, and the limited room to tinker with rates of either personal or corporate income taxes. The single-most prominent tax proposal is the one on cryptocurrencies, although the government had been inclined to ban them altogether for a long time. One can argue that since concealed profits are taxed, although these are illegal, it is okay to tax cryptocurrency gains even if these are in the legal penumbra.
The aggregate level of total expenditure determines what kind of momentum government spending would give the economy. The Modi government has normally tended to hold total expenditure down to about 13% of GDP. In pandemic-crippled 2020-21, spending went up to 17.7% of GDP. The level is estimated to have come down to 16.24% of GDP in the current year. It is slated to shrink further next fiscal.
It is welcome that the government sees merit in using public expenditure to crowd in private investment, considering that the economy had seen anaemic growth of 3.7% in 2019-20, before the pandemic shrank the economy in 2020-21. Clearly, the government is willing to step up capital expenditure, raising it to 4.1% of GDP next year, from 3.6% it expects to achieve in the current year. In 2020-21, even though total spending had gone up to 17.7% of GDP, capital expenditure had been contained at 3.3% of GDP, the government having had to spend more on welfare payouts. In the current year, too, spending on vaccinations and other pandemic assistance constrained the ability to spend on asset creation. The revised national income statistics released yesterday put gross fixed capital formation as a proportion of GDP, a key determinant of growth, at 28.6% and 26.6% of GDP for 2019-20 and 2020-21 respectively. The advance estimates for 2021-22 put this ratio at an optimistic 29.6%. Even then, the fact remains that the fixed capital formation/GDP rate that had dipped below 30% after the Modi government took office has not recovered to the pre-2015-16 levels, despite liberal incentives, tax cuts and inflows of large quantities of foreign direct investment. To remedy that, the government has to raise its own outlays on capital expenditure and create policy that would induce private expenditure in capital formation.
One good thing the finance minister has done this year is to eliminate extra-budgetary resources to finance its expenses. This cleans up accounting and makes it easier for foreign investors to invest in the green bonds the government proposes to issue.
Containing the fiscal deficit at 6.4% of GDP is sensible. The trouble with a large fiscal deficit is that it can set the stage for the government to appropriate savings the private sector claims for its own investment needs, leading to excess demand, which spills over as inflation and a larger current account deficit. At a time when the private sector holds back investment spending, it makes sense to run up a fiscal deficit, and to bring it down gradually. That is what the finance minister seeks to do, targeting 4.5% of GDP by 2025-26. Setting that target beyond the next general election is prudent, too.
The one major flaw of the budget and its underlying policy stance is protectionism. The share of import duties as a proportion of GDP has steadily been going up, and not just the rates on favoured product groups, whose producers stand to gain. Customs receipts are slated to go up 12.6%, even as overall tax receipts are estimated to grow 9.6%.
The notion that the government should eliminate or reduce duties on goods India does not produce and raise them on things India could produce assumes almost divine omniscience. India has used the infant industry justification for protecting sectors of the domestic economy to infantile results. If you eliminate import duty altogether on an item, because no one produces them at present, you thwart any possible domestic production of that good. Raising import duty on something else, on the ground its producers should grow in India, hurts those who use this particular good as an input to their own production. The most sensible policy on import duty is to have a low, uniform rate of duty that gives the same uniform rate of effective protection to value added at all stages and in every segment.
Another major policy omission, although this can be remedied outside the budget as well, is creating a vibrant market for corporate debt in India, a pre-requisite for significant investment in infrastructure that does not run the risk of creating a non-performing asset problem for banks a few years down the line. The government has not yet set up the Credit Enhancement Guarantee Corporation it announced in the 2019 Budget.
Even then, to give the finance minister credit, she could have done a far worse job than she actually has, with Budget 2022-23.
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