Budget 2022: FM stays on fiscal correction path, banks on capex push

On the back of an expanded public investment programme, Finance Minister Nirmala Sitharaman has set a fiscal deficit target of Rs 16.6 trillion for 2022-23, or 6.4 per cent of nominal gross domestic product. This compares with Rs 15.9 trillion (6.9 per cent of GDP) Revised Estimate and Rs 15.1 trillion (6.8 per cent) Budget Estimate for 2021-22.

“The Fiscal Deficit in 2022-23 is estimated at 6.4 per cent of GDP, which is consistent with the broad path of fiscal consolidation announced by me last year to reach a fiscal deficit level below 4.5 per cent by 2025-26. While setting the fiscal deficit level in 2022-23, I am conscious of the need to nurture growth, through public investment, to become stronger and sustainable,” Sitharaman said in her Budget speech on Tuesday.

Fiscal deficit is the difference between the expenditure and revenue of a government when the former is higher.

However, the assumption of nominal GDP growth for FY23 is 11.1 per cent. 

The 2021-22 Economic Survey on Monday forecast real GDP growth of 8.8.5 per cent. Going by these numbers, the deflator assumed by the Centre seems to be around 3 per cent, a rather conservative estimate given that the survey itself warned about inflationary pressures going ahead.

“We had a difficult job of trying to estimate nominal GDP. The current year’s GDP is essentially an estimate, which is on pre-Omicron trend. In adding to next year’s nominal, there is a slight discount as we take our own incremental estimates. We have assumed real GDP growth next year slightly lower than what economists have told us,” Finance Secretary TV Somanathan explained at the post-Budget media briefing.

“The nominal GDP growth this year could be above 17 per cent on a real GDP growth of 9 per cent due to high deflator. The deflator next year could have a base effect because of that, and hence could be lower,” Somanathan said.

The total FY23 Budget size is pegged at Rs 39.4 trillion, a 4.5 per cent increase over FY22 RE of Rs 37.7 trillion. Of this, revenue expenditure for FY23 has been budgeted at Rs 31.9 trillion, almost the same as revised RE of FY22.

The big jump comes in capital expenditure. The capex BE for FY23 is Rs 7.5 trillion, a 24.6 per cent increase over the FY22 RE of Rs 6.02 trillion. The FY22 capex BE was Rs 5.54 trillion.

“The virtuous cycle of investment requires public investment to crowd-in private investment. At this stage, private investments seem to require that support to rise to their potential and to the needs of the economy. Public investment must continue to take the lead and pump-prime the private investment and demand in 2022-23,” Sitharaman said.

The Finance Minister also said that outlay for loans to states for their capex and infrastructure sector requirements will be to the tune of Rs 1 trillion in FY23. These will be 50-year interest-free loans over and above the normal borrowings allowed to the states.
 

This allocation will be used for PM Gati Shakti related and other productive capital investment of the states, supplemental funding for priority segments of PM Gram Sadak Yojana, digitisation of the economy, and reforms related to town planning schemes.

“An early implementation of the enthusing 24.5 per cent expansion in capital spending to a substantial Rs 7.5 trillion can trigger a durable economic growth momentum, with the potential to augment job creation, prop up domestic consumption, and hasten capacity expansion by the private sector,” said Aditi Nayar, chief economist, ICRA. “The impact of higher capex will be complemented by the interest-free bonds of Rs 1 trillion to the states; that will help them prioritise capex even as they traverse the challenges posed by the end of GST compensation,” Nayar added.

“Prioritising the growth revival, FM Sitharaman today presented a Budget that showed modest fiscal consolidation. Revenue targets look credible, and given the strong growth recovery, we see limited risks of a slippage next fiscal year,” said Rahul Bajoria, chief India economist with Barclays.

Bajoria added that the revenue targets set in the Budget were realistic and that the government has maintained its intention to meet the medium-term fiscal deficit consolidation glide path of hitting a fiscal deficit of 4.5 per cent by FY26.

On the revenue front, the tax revenue target for FY23 stands at Rs 19.35 trillion, compared with FY22 RE of Rs 17.65 trillion and FY22 BE of Rs 15.45 trillion. Tax revenues have been a bright spot for the Centre in FY22, and the finance ministry would like to keep it that way in FY23.

Non-tax revenues have been pegged at Rs 2.69 trillion, compared with FY22 RE of Rs 3.14 trillion and BE of Rs 2.43 trillion.

“The Budget also seems to be presented in the backdrop of likely pandemic aftereffect, which is reflective in the relatively conservative estimation of growth of merely 11.1 per cent nominal GDP, and receipts,” said Vijay Chandok, MD & CEO, ICICI Securities, adding, “Thus, there is a likelihood of lower than projected fiscal deficit.”