Budget 2022 may be work of restoration, but challenges for FM no less steep

If the last Budget was about reviving India’s economy after the contraction of 2020-21, the upcoming one in 2022-23 is all about restoring its health to pre-pandemic levels. And, the challenges facing finance minister Nirmala Sitharaman are no less steep.

Recovery has taken place in 2021-22 (FY22). The first advance estimates for FY22 project real GDP growth at 9.2 per cent compared with a contraction of 7.3 per cent in FY21. Corporate results have been strong and the Centre’s revenue from direct and indirect taxes will easily exceed the budgeted targets.

The formal economy has broadly bounced back from the two deadly waves of Covid, which hit this FY. Markets have seen a bull run and the 2021 calendar year saw 44 ‘unicorns’ being created.

However, there are still worryingly deep signs of distress. Many micro, small and medium enterprises (MSMEs) are yet to fully recover, and those in ‘touch-services’ sectors like hospitality, leisure, tourism and others have been badly impacted.

According to official data, private final consumption expenditure, a proxy for household consumption, is expected to be below pre-pandemic levels. Household savings have been hit by increased health care expenditure and inflation. According to a report by Oxfam, 84 per cent of households saw a decline in their income due to Covid.

Ahead of the crucial state elections in Uttar Pradesh, Punjab, Chhattisgarh, Goa and Manipur, unemployment has become a major election issue, as the recent protests by railway job aspirants show.

Also, a report by Azim Premji University in May said 230 million Indians were pushed back into poverty since the pandemic struck India.

Economists expect Sitharaman’s fourth Budget to continue on the path of mild fiscal correction and massive public investment push in order to raise incomes, consumption and create jobs.

“The main objective of the Budget should be to create an environment by creating an enabling condition by giving higher weightage to short-term stabilisation policy rather than long-term policy. The Budget should also allow for very gradual fiscal consolidation,” said Soumya Kanti Ghosh, chief economic advisor, State Bank of India.

Most analysts expect the fiscal deficit target for FY23 to be around 6.5 per cent, compared to Budget Estimates (BE) of 6.8 per cent in FY22. This year’s target may not be met due to higher expenditure burden.

“We expect the FY23 Budget to consolidate and strengthen the plan and contours set out in the FY22 Budget rather than trying out new things. Also, it should continue with the revenue and capital expenditure pattern of FY22 to provide stability and consolidation to the past/ongoing effort. It should focus on aggregate demand with an aim to generate employment opportunities in areas/sectors that have disproportionately been impacted more by the Covid,” said Sunil Kumar Sinha, Principal Economist, India Ratings.

Sinha said that capex for the coming year could be more targeted to focus on rural infrastructure and projects with a short-gestation period.

Along with capital expenditure, the upcoming Budget is also likely to continue focus on delivery of welfare schemes for India’s poorest. Sinha and others expect flagship schemes like NREGA, PM Kisan and food guarantee programmes, to see an expansion in their allocation.

For the coming year, most agencies see real GDP growth at anything between 7.3 and 9 per cent. They believe that the ongoing Omicron wave will not have any debilitating impact on the economy.

Industry bodies say that unlike touch services, manufacturing across the sub-sector remains in expansion mode and further support is required. Measures like additional incentives for jobs created should be provided under the productivity-linked incentive (PLI) scheme.

The touch-services will require more than gentle hand-holding. The expectation is that emergency credit guarantee and loan guarantee schemes for MSMEs and sectors like tourism and others will be extended and streamlined.

 The 2021 Budget steered clear of populist taxation measures. For FY23, interest groups and bodies from various sectors are clamouring for tax cuts and incentives. Having reduced personal income tax rates in 2020 and corporate tax rates in 2019, it is unlikely that the finance minister could go for major rate tweaks.

Also, the tax department would like a repeat of 2021-22 in terms of tax revenue collections.

“Given the fiscal challenges, it is unlikely that we would see any cut in direct taxation, both for individuals and corporates. Even on the indirect taxation front, material changes are unlikely. The high duties on fuel will most likely continue despite the recent rise in crude prices. We do see the possibility of a further tax hike on tobacco,” said Amar Ambani, head of institutional equities at YES Securities.

Challenges facing the FM

• Touch services like hospitality, leisure, tourism in desperate need of support
• Unemployment a major issue ahead of state elections
• Household consumption still below pre-pandemic levels amid stressed incomes
• Millions said to have slipped back into poverty
• Inflation a concern amid high global commodity prices