The risks of minimalism

Nirmala Sitharaman has chosen to not rock the boat while presenting a minimalist Union Budget for 2022-23. She has imparted no shocks, and not embarked on any potentially stormy taxation initiatives. Opting instead for stability, the finance minister has left taxes unchanged, for all practical purposes, and stuck to capital investment as the focus of expenditure. She has reduced the deficit by the minimum level expected, and continued with her transparent approach to budgeting. There are further steps to make life easier for taxpayers and to reduce the scope for disputes. For good measure, the Budget speech was shorter than usual and, other than a reference to the Mahabharat, devoid of the usual poetic flourishes.

All this is soothing to an economy that is still not entirely on even keel, since no one knows from where the next shock will come—Covid, monetary contraction by central banks elsewhere, even war, or something completely unanticipated. The general response, therefore, is one of relief. That being so, the minister may have read the mood right at a time when the system is still recovering from a once-in-a-century pandemic.

Yet caution brings its own risks, especially when stress is evident. The fiscal deficit continues to be high by any conventional yardstick, in part because the assumption for tax revenue growth next year is modest at 9.6 per cent. Such revenue caution may be well advised, given the high base set by this year’s handsome 23.8 per cent growth in tax revenue—substantially in excess of what was budgeted. It doesn’t help that non-tax revenue will actually decline next year, though that would be after a surge of 51 per cent this year.

Growth in “revenue receipts” (that is, not counting borrowings and disinvestment proceeds), is therefore set to be barely 6 per cent—much lower than the anticipated 11.1 per cent growth assumed for the nominal gross domestic product (that is, real GDP growth plus inflation). That last number raises its own questions. Given the rate at which inflation is running, it would seem that the minister has not gone by the growth projection (real, not nominal) of 8 to 8.5 per cent mentioned in the Economic Survey, and may have assumed slightly slower real growth. More caution on display, perhaps.
 

If the minister’s gambit is to under-promise and over-deliver, one can understand why she has given up on the ambitious disinvestment targets of recent years—targets that have been missed by embarrassingly wide margins. Assuming that a relatively modest sale of Life Insurance Corporation shares goes through before the end of March, the total money raised through disinvestment this year will reach the revised figure of Rs 78,000 crore, well short of the original target of Rs 1.75 trillion. All that is slated for next year is Rs 65,000 crore.

One should not rule out Ms Sitharaman doing better than what she has projected for next year’s total revenue numbers. But the effect of making modest revenue assumptions, while also trimming the deficit from its pandemic-prompted levels (in relation to GDP), is that there is little room for expenditure growth. Revenue expenditure is to grow by less than 1 per cent, something that has no recent precedent. This is especially noteworthy because the large borrowings of recent years, to finance high deficits, have delivered a surging interest bill. This is slated to grow by as much as 38.4 per cent over the two years to 2022-23, and eat up a staggering 60 per cent of the total increase in expenditure over the two years.

The consequence is that the expenditure on all manner of other budget items has been constricted for next year. The subsidy bill has been pared sharply, as has the money to be spent on the rural employment guarantee programme. Defence gets barely enough to neutralise inflation, rural development gets no increase at all, and agriculture gets a hike of just 2.5 per cent. What is set to grow sharply is capital expenditure, especially on the Gati Shakti initiative that the minister dwelt on at length in her speech in Parliament. Transport, therefore, gets more than agriculture, education and health combined!

One has to wonder whether a more balanced set of outlays may not have been the wiser course. But then, the Jal Jeevan Mission to provide tap water to another 38 million households gets a handsome increase in outlay, as does urban development. The government’s preference for building the country’s physical infrastructure and providing welfare goods, rather than spending on traditional developmental heads, continues. It would seem that the talk of a K-shaped recovery, the lack of jobs and, therefore, of the need for more consumption support at the base of the pyramid, has had little or no impact on the government’s thinking with regard to economic (and for that matter, political) management.

Despite the squeeze being applied on total expenditure, net market borrowings are to increase by a massive 32.3 per cent to Rs 11.59 trillion, prompting an immediate response from the bond market, where the yield on the benchmark 10-year government bonds has climbed by about 20 basis points. Given the rate of inflation, especially in wholesale prices, an argument exists in favour of a regime of higher interest rates that would be in line with the current global trend. But that carries the cost of raising the government’s interest bill even further. The makers of fiscal and monetary policy must be preparing for an interesting conversation in the coming days.

Among the policy initiatives mentioned in the Budget speech, the most interesting one is the new tax on crypto-currencies. It is designed rather obviously to kill everything that might compete with the promised digital rupee to be introduced by the Reserve Bank of India. The precise role to be assigned to the digital rupee must wait for announcements. Logically, it should be a route to financial disintermediation—possibly only for wholesale transactions, and therefore not affecting commercial banks’ retail operations.