The major thrust of the just announced Union budget is on enhancing capital expenditure. This, particularly in the area of infrastructure will have a favourable effect on growth, not only in the current year but also in the years to come, says Dr C Rangarajan, economist and former governor of the Reserve Bank of India. This emphasis on capital expenditure is a major takeaway from the budget, says Dr Rangarajan speaking to Financial Express Online in the context of the just announced Union budget. He says, “it is for the first time that capital expenditure accounts for as much as 45 per cent of the fiscal deficit. If this continues then it be a directional change and therefore of great significance.”
Estimates on inflation
However, when looking at some of the numbers, he says, “there are some concerns in the sense that the budget is built on the assumption of a nominal GDP (Gross Domestic Product) growth rate of 11.1 per cent. Now, the Economic Survey indicated that the real rate of growth in the coming year will be between 8 per cent and 8.5 per cent therefore the implication, when seen in the context of the nominal rate of growth, is that the inflation will be low at about 3 per cent.” This, he feels does not seem right and the 8 to 8.5 per cent real rate of growth in 2022-23 somewhat unrealistic. He points out that the the rate of growth of the Indian economy in the second half of the current year (2021-22) “when there was no base advantage, the growth rate was less than 6 per cent. Therefore, to jump from that to 8 or to 8.5 per cent seems rather unrealistic.” In any case, as far as the budget is concerned what is more relevant, he says, is the nominal rate of growth rather than the real rate of growth and here the 11.1 per cent nominal growth seems an underestimate and not consistent with the expected inflation trends or the real growth.
If the nominal rate of growth is taken at a slightly higher level then perhaps the revenue projections could have been better and that could result in some more expenditures by the government or a reduction in the fiscal deficit.
Looking at some of the numbers, he says, “if you look at the revenue projects in terms of the revised estimates, the revenue growth is very small. The gross tax revenue is expected to increase in 2022-23 by 9.6 per cent over the revised estimates of 2021-22. This is a small increase and is because they have assumed a very low nominal growth and therefore a low growth in revenue with a buoyancy of less than one (or around 0.87).”
Customs Duties & Costs
On the indirect tax side, one of his concerns, is the move to resort to increase in customs duty with a stated intent to protect the domestic industries but to him it seems more like a return back to the import substitution era, something that the entire liberalization programme was against. He is however quick to add that this is not to say that it should not be done for there could be some exceptions but then to include a long list of commodities is not correct and with an apparent good reason. After all, he points out, it was always argued that this approach will lead to a high cost economy. This temptation must be resisted and only resorted to in select cases like for instance where there are clear cases of dumping, say from China. Otherwise, it just leads to a high-cost economy, which is counter productive and against the spirit of liberalization.
Total Expenditure
On the expenditure side, he says, “while the increase in capital expenditure is welcome, the increase in total expenditure is quite modest. It is 13.2 per cent over the budget estimates of the previous year and 4.6 per cent over the revised estimates. Had the revenue projections been higher it could have enabled the government to raise the total expenditures because there are some revenue expenditures which are really called for be it providing support to some of the sectors that have been badly affected or some segments of the society or support to some vulnerable groups that have not as yet got their regular income.”
Fertiliser and Food subsidy
Also, in the case of the expenditures, some of the subsidies have been brought down, and quite substantially at that, such as the fertilizer subsidies and food subsidies. It is difficult to say on the extent to which it will be possible at all and there is still lack of clarity on how this will be brought about but to him, is in some sense a disturbing element as far as the expenditures are concerned. “The fertilizer subsidy is reduced by Rs 35,000 crore and food subsidy by Rs 86,000 crore which means the two taken together is over Rs 1 lakh crore and does not seem implementable. Also, there is no clear justification to reduce the food subsidy,” he says.
Fiscal Consolidation
All of this, Dr Rangarajan says takes to the concerns around fiscal consolidation. “The programme of fiscal consolidation seems weak because the fiscal deficit for 2021-22 is a shade higher than at 6.9 per cent than the 6.8 per cent that was originally budgeted. Add to that the projection made for next year is 6.4 per cent” and this, he says, essentially means that the borrowing programme will be quite high. “The market borrowing programme (government securities and treasury bills) shows an increase from Rs 8.7 lakh crore in 2021-22 to Rs 11.6 lakh crore in 2022-23 and the interest payments, interest payments are estimated at 42.7 per cent of the revenue receipts of the Centre in 2022-23. That means nearly half of the revenue receipts is going in interest payments.”
Debt to GDP ratio
What also may be worth noting, Dr Rangarajan points out, is the debt to GDP ratio which is expected to reach a level of 60.2 per cent in 2022-23 (as against 59.9 per cent of the GDP in 2021-22) and is a far cry from the desired level of 40 per cent. So, with a high market borrowing programme, the question arises is how will it be managed and whether this will call for a liquidity support from the Reserve Bank of India will be needed? And, if that happens when then will happen to inflation? These are some of the questions that arise. The pressure on interest rates is also likely to be there. The level of fiscal deficit is twice the number prescribed under the FRMB (Fiscal Responsibility and Budget Management) Act for fiscal deficit (which suggest an ideal level of 3 per cent).
The point really is, he says, “that while one can understand the difficult situation faced by the country as a consequence of the pandemic but then we do need to very actively think of a roadmap for fiscal consolidation.”
Nature of Capital Expenditure
On the important point about capital expenditure, Dr Rangarajan points to the much celebrated golden rule on this it that one need not worry about it as long as it is all meant to create physical assets, which in turn will create returns. Not surprising therefore, even with a high capital expenditure, the focus now will have to be the nature of asset creation that is revenue generating (say instead of say creating a huge loss-making public enterprise, which may seem like creating an asset but in terms of the burden on the exchequer no different in effect than that of revenue expenditure).
Going by the comments of Dr Rangarajan and considering the expenditure profile given out this time, there does seem reason for hope as they are all intended for areas like roads, railways and defence. But again, one hopes it is not to pay off the debt of any of the entities in these or not resulting in revenue generating assets. For the result then, despite being a significant shift originally, may not finally dish out the ideal outcome. One may have to wait and at the moment only hope that it does not happen and that all the emerging challenges at the moment get addressed.
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