Budget: Wanted, a healing touch

2022 was meant to be a crucial year for Prime Minister Narendra Modi. After nearly two years of anxiety, rising prices, supply chain disruptions, declining investments and stagnant demand, this was the year to get the economy back on an even keel. However, Omicron’s rapid spread has only added to existing vulnerabilities.

2022 was meant to be a crucial year for Prime Minister Narendra Modi. After nearly two years of anxiety, rising prices, supply chain disruptions, declining investments and stagnant demand, this was the year to get the economy back on an even keel. However, Omicron’s rapid spread has only added to existing vulnerabilities.

As some of India’s key states, including its most populous province, Uttar Pradesh, go to polls, the budget is likely to be populist. However, a whole host of factors, including an end to the dream run of rising tax revenues and disinvestment not yielding the desired returns, will restrict spending. Food and fertiliser subsidies will continue, and allocation for schemes such as MNREGA or the National Rural Employment Guarantee Act, will increase. After two brutal years, Budget 2022-23 could well be a ‘feelgood’ one.

Spending high on growth

The health of India’s economy depends on the health of its people. The previous budget had earmarked Rs 35,000 crore for vaccination; this one could see a sizeable allocation for booster doses and health infrastructure.

Food and fertiliser subsidies as well as MNREGA are expected to be the other areas of major expenditure. Ex-finance secretary Subhash Chandra Garg predicts a further rise in food subsidy. The government has spent nearly Rs 6 lakh crore on MNREGA this year, over Rs 2 lakh crore more than what was budgeted. The flagship Jal Jeevan Mission will continue to remain in focus. The project, which aims to provide tap water connections to 18.6 million households, was allocated Rs 50,000 crore in the last budget.

Union finance minister Nirmala Sitharaman had increased the overall outlay for infrastructure by 26 per cent to Rs 4.39 lakh crore. It is expected to go up to Rs 7 lakh crore this time. So far, while gross fixed capital formation or investment is in the green, it is only 2.6 per cent above FY20 levels. This growth, says a Crisil analysis, is largely driven by state-led infrastructure programmes. Construction has a spillover effect on the economy, creating jobs and incomes for millions. “It is imperative to support the construction industry. In 2004-05, construction was 15 per cent of GDP, which has come down to 6.7 per cent,” says Nilesh Shah, MD, Kotak Mahindra Asset Management.

The real challenge has been to get the private sector to up its investment levels. The services sector, start-ups and renewable energy projects have attracted private investment; telecom may become attractive too, with the new policy package in place. But the nature of infrastructure projects, access to financing and complexity of rules remain impediments, as do execution-related delays. The government’s humungous Rs 145 lakh crore National Infrastructure Pipeline is running behind on meeting its targets. On November 30, the Reserve Bank of India (RBI) released a report on the financial position of urban local bodies, reflecting the tremendous strain they are under. This has aff­ected the ability of India’s towns and cities to build infrastructure. As part of the infrastructure push, the government could consider a series of measures to encourage municipal bonds. There are also recommendations to introduce surety bonds to replace bank guarantees, which are a big dampener for anyone doing business, and to lower the tax component on cement, which is the second most consumed commodity after water and is taxed at 28 per cent. “Nearly 65 per cent of the cement is bought by individuals. But it is also a large input in infrastructure projects,” says Vinayak Chatterjee, an infrastructure expert and chairman of CII’s National Infrastructure Council.

Helping the urban poor

Even if the Omicron strain is not as severe as its predecessors, the urban poor and the vulnerable are in no state to withstand a fresh round of curbs, having exhausted all their savings in the first two waves. Dali Rani Das, 54, a domestic worker in South Delhi, is a case in point. She and her husband, a school bus driver, earned up to Rs 35,000 a month—till the pandemic upended their lives. With schools shut, her husband lost his income. For the past two years, Das has been relying on savings and debt to survive. With Omicron now rearing its head, their prospects seem unlikely to improve.

An urban NREGA has long been under considera­tion, but designing a new scheme and implementing it will take time, which is why the government may opt for a pilot scheme in some cities and increase allocations to existing schemes. How will the Centre fund its programmes? While tax revenues showed high growth and buoyancy in the first six months of the current fiscal, growth ebbed from 60 per cent monthly in tax revenues to 18 per cent. D.K. Srivastava, chief policy advisor, EY India, expects it to go down further to 15 per cent for the remaining months of this fiscal. Annual growth in tax revenues is expected to be in the range of 30-35 per cent. The government is most likely to miss its Rs 1.75 lakh crore disinvestment target. Rural and urban demand are likely to take a further hit because of Omicron. “The Covid story is a medium-term one and will continue to have an economic impact. Therefore, even if fiscal consolidation is marginally postponed, infrastructure expenditure should not be postponed,” adds Srivastava.

Besides, as Neelkanth Mishra, co-head, India Equity Strategy, Credit Suisse, notes, a rising fiscal deficit is hardly the problem when it comes to spending. As it turns out, the pandemic hindered the government’s ability to spend. Government consumption in the September 2021 quarter was 17 per cent lower than in September 2019 (in real terms). Had it grown at the pre-Covid pace, the overall GDP would have been 4 per cent higher than in September 2019. Dismissing the fiscal constraint argument, Mishra notes that a substantial Rs 4.7 lakh crore or 2 per cent of GDP is the government’s cash balance with the RBI—essentially unspent funds. The problem lies in execution—various departments and states have missed their expenditure targets.

The government has so far refrained from direct support to sectors such as trade, hotels and communications that continue to bear the brunt of the pandemic-induced slowdown, in the hope that recovery would lift several of these sectors that employ millions of Indians. However, Omicron has upset some of those calculations. Inflation is rising, and is expected to have hit a six-month high in December. Balancing the immediate needs of the economy with bigger ideas to place the country on a higher growth trajectorythat will be the burden of Budget 2022.

Leave a Reply