The non-medical interventions such as economic restrictions, lockdowns, business closures due to the COVID-19 pandemic in the last two years have taken a toll on economic growth worldwide. The Indian economy was no exception, but it has proven to be resilient. As the Economic Survey for 2021–22 and FM’s Budget Speech for 2022–23, the Indian economy has recovered robustly across the sectors. Absolute GDP has surpassed the pre-pandemic levels, and Real growth in GDP in 2021–22 was 9.2 per cent, and the economic survey has estimated the real growth to be around 8-8.5 per cent. Many announcements in the Union Budget 2022-23 will ensure that this momentum continues.
The Budget is an annual statement of the Union Government’s receipts and expenditures. However, it has become a document that signals the Government’s policy intentions over the years. Since 2014, the Government has brought many subtle changes to the Budget, be it transparency or accountability. We highlight some of these changes and important announcements in the Budget 2022-23.
First, unlike in the previous regimes, the Budget has been conservative regarding forecasts and projections of growth or revenue. For instance, the Economic Survey had estimated real growth to be 8 per cent and 8.5 per cent. In contrast, the nominal growth estimated by the Budget is 11.1 per cent. Nominal growth is calculated by adding real GDP and GDP deflator (which accounts for the inflation). The GDP deflator is currently slightly above 4.5 per cent. Thus, the real GDP as estimated by the Budget is around 6.6 per cent. While framing a Budget, there is always a temptation to overestimate growth and revenue, especially during elections. It is always better to underestimate and over-deliver.
Second, there has been a push for transparency and honesty in the budget-making process on a related note. The off-budgets borrowings which were not a part of the fiscal deficit until recently have been added to deficit numbers. There is a predetermined glide path of fiscal consolidation. Due to the pandemic, there was a significant rise in the fiscal deficit. However, the fiscal deficit in now projected to be 6.9 per cent of GDP. 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. It will not be difficult for the fiscal deficit to be 4.5 per cent by 2025-26.
There has been a 35.4 per cent hike in Union Government’s budgetary outlay for capital expenditure. This also includes grants in aid. This will have a multiplier effect: It will increase labour force participation, thereby generating demand. There is also a boost to GDP by at least 1 per cent
Third, there has been a reduction in fiscal illusion. Simply put, the fiscal illusion is the phenomenon that occurs when taxpayers and electors are not aware of the fiscal reality. With a predictable direct tax regime, the bilateral trust between the taxpayers (both personal and corporate income taxpayers) and the Government has increased. Further, the FM has not tinkered with the tax slabs. While it would have been in the self-interest of the taxpayers if there were a reduction in the effective tax rate, it would have taken a toll on the revenue. However, there is a need for the simplification of direct taxes. Logically, simplification of taxes requires the removal of exemption. While exemptions decrease litigations, their removal may increase effective tax rates for certain sections. Similarly, the Government has even reduced some direct taxes too. Alternate Minimum Tax (AMT) for cooperative societies has been reduced from 18.5 per cent to 15 per cent.
Fourth, there has been a significant increase in capital investments. Real growth comes from four different sources—consumption, investment, government expenditure and net exports. There has been a recovery in all four sources, but consumption is still a concern. Further, there is also uncertainty in the external sector. Against this backdrop, it is not prudent to slash government expenditure. There has been a 35.4 per cent hike in the Union Government’s budgetary outlay for capital expenditure. This also includes grants in aid. This will have a multiplier effect and increase labour force participation, thus, generating demand. There is also a boost to GDP by at least 1 per cent.
The long-term assets created through capital investments also helps in generating revenue in the long run. Thus, until investments, consumption and exports recover, it is premature to curtain public expenditure. However, there is a caveat. According to an analysis by Neelkanth Mishra, the states have a history of missing expenditure targets. If states struggle to spend, it becomes difficult to achieve the intended outcomes. Thus, states should also find avenues to spend productively.
Fourth, there is a continued push towards ease of doing business. Since 2014, the Government has reduced 25,000 compliances and repealed more than 1,486 archaic laws. There will be a renewed focus on digitisation of records and processes—States including Karnataka, Rajasthan, Kerala UP, Gujarat, Madhya Pradesh, Andhra Pradesh and Telangana. Digitisation of records creates more comprehensive property records and reduces chances of litigation in future. Moreover, there has been a rationalisation of custom duties.
Further, with the use of technology, customs procedures have become more seamless. This would ensure that there is less deterrence and faster movement of goods. At the same time, the Government has acknowledged the issues with the existing Special Economic Zones (SEZs). The Government will introduce new legislation that will replace the Special Economic Zones (SEZ) Act. States will play a crucial role in the proposed economic zones. All large existing and new industrial enclaves will optimally utilise the available infrastructure and enhance the competitiveness of exports. However, the devil will be in the details. The Government should ensure that these industrial enclaves do not meet a similar fate as SEZs.
Fifth, there has been a push for manufacturing. The Government has earmarked 68 per cent of the capital procurement budget for the defence sector in 2022-23 for local industry. This will reduce the country’s dependence on defence imports. At the same time, it will help in employment generation. Similarly, through different Production Linked Incentive (PLI) Schemes, there is potential to create around 60 lakh new jobs. There was an additional allocation for telecom and solar sectors under the existing PLI scheme.
The Union Budget 2022-23 has been really good if one does not look through the lens of individual interest, myopia and preference for tax concessions.