Budget 2022: can it reconcile GDP growth and budgetary discipline?

Interest payments on the public debt eat away at a fifth of the funds of the Union budget every year.

And the share of interest payments, which is much higher than the money allocated to subsidies for the poor (9%), defense (8%) and pensions (5%), should consume a greater share of budget money. in the future if high budget deficits are not brought under control.

The 2022-2023 EU budget must strike a balance between increasing output or GDP and maintaining fiscal consolidation in order to control public debt, which now stands at 90% of GDP.

The last economic survey 2021 had strongly argued that growth leads to debt sustainability in the Indian context, but fiscal austerity does not necessarily promote growth. “It’s because the interest rate on the debt paid by the Indian government has been lower than India’s growth rate,” he explained. But with interest rates rising due to high inflation, the growth rate must be higher once the economy normalizes.

Currently, the total interest payments on the debt accumulated by the government exceeds Rs 8 lakh crore. To put things into perspective, this amount is equal to the combined budgeted defense expenditure of Rs 3.4 lakh crore and government grants to the state government of Rs 5.57 lakh crore in 2021-22.

Compared to revenue collected, the annual interest charge of Rs 8 lakh crore is also much higher than income taxes at Rs 5.61 lakh crore or corporate tax mobilization of Rs 5.47 lakh crore budgeted for 2021-22.

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Experts estimate central government borrowing at a high level in 2022-23. The Bank of Baroda research team said gross borrowing is expected to be between Rs 12-13 lakh crore in 2022-23. This will be slightly higher than the Rs 12.05 lakh crore expected in 2021-22.

“This is likely to put pressure on yields which should hit the 7% mark in FY23, albeit gradually,” he said. Bank of America Securities said it expects total gross borrowing of Rs 13 lakh crore in 2022-23. “We are aware of the limitations of National Small Savings Fund (NSSF) inflows as a source of exercise funding,” the research report states.

The increase in government borrowing is the result of a soaring budget deficit without a credible timetable for fiscal consolidation over the past decade. The pandemic has already pushed the budget deficit to 9.5% in the first pandemic year 2020-21. The government had to roll out the AtmaNirbhar Bharat package, including liquidity support from the Reserve Bank of India, which was around Rs 2 lakh crores or 13% of GDP.

The budget deficit is set at 6.8% in 2021-22. The government has set itself the objective of achieving a level of budget deficit below 4.5% of GDP by 2025-2026, with a fairly steady decline over the period.

Another worrying factor is the finances of the state government. In 2020-21, the gross state budget deficit exceeded 3% of GDP due to the pandemic outbreak and loss of revenue. The RBI, in its state report, said fallout is also expected in 2021-22. Currently, the combined budget deficit of the center and the states is around 10%.

Public debt to GDP, which was below 70% before the pandemic, has reached over the past two decades the level of 90% due to higher borrowing and lower GDP. Considering the fall in output or GDP in the near future, it is very important to stick to the path of fiscal consolidation, experts say.

New market borrowing should also carry a higher interest rate for the government. The 10-year G-sec yield is currently around 6.6%. In fact, the RBI’s accommodative monetary policy, with low interest rates and excess liquidity, had kept yields below 6% for a long time after the pandemic hit. According to RBI statistics, the government’s borrowing program in the first half of the year went smoothly, with the 10-year g-sec yield remaining within the range of 5.97-6.26%.

But that trend has now reversed as inflation, which is at a high level, is pushing yield higher.

Some defend themselves by saying that the rise in public debt has been a post-pandemic global phenomenon. “The Covid-19 shock has pushed up debt-to-GDP ratios across the region,” says a research note from Morgan Stanley.

However, rating agencies would be watching the fine print of the budget carefully for future growth prospects. Rating agency Fitch had recently warned that India could face a downgrade in its rating if it failed to put the public debt-to-GDP ratio on a downward path. Global ratings agency Moody’s said the risks associated with high leverage and low debt affordability remain. S&P, another global rating agency, however, expects the debt-to-GDP ratio to stabilize or flatten.

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