“Overall, this budget has set clear long-term goals and, in line with big global government, there is significant infrastructure spending to spur growth. With inflation contained globally, it would be increasingly difficult to finance the budget deficit with the capital account surplus. I see clear room for maneuver to reduce the budget deficit and create space for private borrowing.
By Atanu Chakraborty
India’s budget is a unique instrument. Only a few emerging economies can boast of having an instrument that combines political pronouncements with the flow not only of central government funds, but also influencing state spending. In a way, this also has an impact on monetary policy. Although the advanced economies have robust fiscal instruments, I observed following the global financial crisis that they did not have an annual policy document like ours and depended far too much on monetary policy adjustments from their respective central banks. To the point that, as of 2019, the IMF urged these economies to use fiscal instruments as monetary instruments.
In one of the finance minister’s shortest budget speeches this year, she highlighted the priorities of “Amrit Kaal”. These priorities are forward-looking in the form of the digital economy, energy transition, climate change and incentives for private investment. I hope future budgets will use them as cornerstones.
The government has, on the whole, kept the contours of our tax structure unchanged. Fiscal stability will dispel many apprehensions in the minds of business people and stimulate economic activity. I also noticed an interesting reform, which allows a taxpayer to file an additional return up to two years after the end of the relevant taxation year. This reform has the potential to generate greater tax revenue and reduce unnecessary litigation.
Tax collection was one of the strengths of fiscal year 21-22 and exceeded nominal growth. However, in light of the high nominal growth expected in FY22-23, a more aggressive tax collection projection was expected with higher momentum levels.
The introduction of digital currency and the tax on digital assets settled the uncertainties around cryptocurrencies, which were disrupting the entire banking system. Techies who have developed different cryptocurrencies can now redirect their talent to develop new technologies around blockchain to help fight the scourge of cyber threats.
Growth, a key condition for improving income levels, is the primary objective of this year’s budget. To revive the economy at its peak, the focus has been on Capex, a strategy this government has followed since 2019. Prime Minister Gati Shakti is emphasizing sectors related to mobility and logistics. This will have a double impact. Investment in infrastructure would boost employment as well as growth in sectors such as steel, cement and construction. Completion of these projects would improve mobility in India, and data from the past two years has shown how improved mobility provides an upward momentum to the economy. Another notable push is increased investment in the road, rail, communications and warehousing sectors, and it will boost services that had been hit during the pandemic. In fact, the choices were limited. Given the compression of demand, growth could only come from increased government spending, and that was perhaps the only way. However, since the infrastructure projects are long-term in nature and the objectives of “Amrit Kaal” are enumerated, private investment is the only way out in the medium term. For this, the development of the bond market is essential and other initiatives in this area were envisaged. Perhaps we missed the fine print, but the consistent treatment of long-term gain between stocks and bonds is important for fund flows in the infrastructure sector.
It was heartening to see a 68% commitment of defense purchases from domestic sources. This, together with the share of the R&D budget for weapons platforms to be channeled through the Indian private sector, will strengthen India’s defense equipment supply chain. These steps have the potential to create great tech hubs in India, and skilled technical manpower is available in the country.
Besides public investment, reforms are the other leg that supports economic growth. Considering that subsidy reforms are not the most desirable at this stage, reforms aimed at increasing revenues must be taken further. In this context, few nuanced tax reforms are welcome. However, one would also have expected the focus to be on divestment, where major policy decisions have already been made in the past. Other measures, whether legislative or administrative, need to be highlighted through budget announcements to maintain momentum. At the macro level, the budget deficit of the center and the States combined amounts to 10.8% and the public debt to 88% of GDP. However, on the revenue disaggregation, there appear to be considerable benefits. Nominal growth at 11.2% is a little lower by 1 to 1.5%. This will yield an additional 1-1.5 lakh crore in gross tax revenue. In divestment at 0.75 lakh crore, estimates are much lower. If LIC’s IPO is successful and the divestiture of BPCL and Container Corporation materializes, non-debt inflows would be much higher than expected. There is a potential for underestimating the budget deficit by 0.5 to 1%. The privatization of banks, if carried out, would further increase revenues and give a favorable wind to the reform process.
Overall, this budget has set clear long-term goals and, in line with big world government, there is significant infrastructure spending to spur growth. With inflation contained globally, it would be increasingly difficult to finance the budget deficit with the capital account surplus. I see clear room for maneuver to reduce the budget deficit and create space for private borrowing. Privatization, asset monetization and borrowing programs would be the main things to watch in this year.
(Atanu Chakraborty is Chairman of HDFC Bank and former Secretary of the Department of Economic Affairs. The opinions expressed are those of the author.)
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