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FM Sitharaman has made a prudent choice in pushing capex instead of demand stimulus

Finance Minister Nirmala Sitharaman Tuesday delivered the Union Budget 2022-23, wherein she proposed a big boost to capital expenditure and announced several infrastructure projects to pump-prime private investment and economic recovery.

In addition, she announced relief measures for sectors adversely hit by the pandemic such as MSMEs and hospitality. Initiatives have also been proposed towards affordable housing, which helps investment while scaling down outlay on subsidies.

Overall, instead of propeling consumption, something that could have pushed demand and raised prices, the government continued its focus on trying to improve the supply side. Infrastructure investment provides both a demand stimulus and eases supply. It can crowd in private investment and push up growth and jobs.

The government resisted the pressure to expand on welfare programmes that can give short-term multiplier and opted for building growth-enhancing infrastructure.

Push to capex and infrastructure

Recognising that private investment has not revived, the FM has proposed a sharp jump in allocation for capital expenditure from Rs 5.54 lakh crore in 2021-22 to Rs 7.5 lakh crore in 2022-23. 

Along with Grants-in-Aids to states for creation of capital assets, the effective capex of the government is estimated at Rs 10.68 lakh crore or more than 4 per cent of GDP. This is good news, particularly for sectors such as steel, cement, road transport and highways, railways and defence. 

The government proposes to use capex spending on infrastructure through the PM Gati Shakti National Master Plan. The focus will be on improved connectivity through roads, railways, airports, mass transport, waterways and logistics that will propel faster movement of people and goods and ease the cost of doing business in India.

Further, to enable states to boost capital spending, the allocation for the scheme to provide financial assistance to states has been raised from Rs 10,000 crore in budget estimates (BE) 2021-22 to Rs 1 lakh crore in 2022-23.

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Buoyant revenue collections but lower disinvestment receipts

The Modi government’s revenue receipts have seen a major jump from Rs 17.88 lakh crore in the budget estimates of the current financial year to Rs 20.78 lakh crore in the revised estimates (RE). This jump is on account of robust tax collections.

While the government had targeted Rs 15.45 lakh crore via tax revenues in its BE, it now expects to receive Rs 17.65 lakh crore from taxes. Corporate taxes are set to exceed their budgeted target by 16 per cent, while income taxes are set to surpass their budgeted estimates by almost 10 per cent.

The government’s revenue collections have been robust, but its non-debt creating capital receipts, particularly the disinvestment receipts have been scaled down from Rs 1.75 lakh crore (BE) to Rs 78,000 crore (RE). This implies that the government may not be able to meet its disinvestment target for the current year. 

For the next 2022-23 fiscal, the estimated receipts from disinvestments have been realistically reduced to Rs 65,000 crore.

Rise in government borrowing

On the fiscal front, FM Sitharaman has projected a glide path, underscoring the need to provide cushion to an economy that is still recovering from the lingering waves of Covid.

The budgeted fiscal deficit, which is the difference between expenditure and revenue, is estimated to reduce from 6.9 per cent of GDP in 2021-22 to 6.4 per cent in 2022-23. At 6.4 per cent, the deficit is on track to reduce to 4.5 per cent by 2025-26.

The fiscal deficit for the current year has been marginally revised upwards from 6.8 per cent to 6.9 per cent. 

While revenue collections were strong, the government’s expenditure saw a rise from Rs 34.8 lakh crore to Rs 37.7 lakh crore. The excess expenditure of roughly Rs 2.86 lakh crore was primarily on account of loans to Air India, meeting expenditure due to cash losses of Air India, food and fertiliser subsidies and higher allocation under the Mahatma Gandhi National Rural Employment Guarantee Scheme.

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Extension of relief to MSMEs

Budget 2022-23 has proposed to extend the benefits to MSMEs — one of the hardest-hit sectors. 

The government has extended the Emergency Credit Line Guarantee Scheme (ECLGS) till March 2023 along with an enhanced guarantee cover of Rs 50,000 crore. With this, the total limit of the scheme has been enhanced to Rs 5 lakh crore from Rs 4.5 lakh crore earlier. This will help small businesses mitigate the distress caused due to the uncertain economic environment due to the pandemic. 

According to a research report by the State Bank of India, the ECLGS scheme prevented 13.5 lakh MSME accounts worth Rs 1.8 lakh crore from slipping into non-performing assets (NPAs). If these units had turned NPAs, it would have rendered 1.5 crore workers unemployed, the report added.

Reduction in subsidies 

The expenditure on all three kinds of subsidies: food, fertiliser and petroleum has been reduced in the budgeted estimates for the next financial year. 

Particularly, the allocation on food subsidies has been reduced from Rs 2.8 lakh crore in RE of 2021-22 to 2.06 lakh crore in the BE of 2022-23. This implies that it is hoped that the stress among households due to the pandemic will ease and the need for high subsidies will reduce. 

Having given the push to public infrastructure and higher borrowing, the government now needs to ensure that private investors are able to access money at affordable rates.

Easing the inflow of foreign capital and inclusion in global bond indices, financial sector reforms including banking and bond market reforms should follow the budget to ensure that higher private capex follows the FM’s push for public investment.

Ila Patnaik is an economist and a professor at National Institute of Public Finance and Policy.

Radhika Pandey is a consultant at NIPFP.

Views are personal.

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Source: The Print

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