The government has taken the route of stepping on the gas to spend more and boost investments by using the current fiscal space created by the buoyant tax collection and a longer 5-year glide path to achieve a fiscal deficit of 4.5 per cent of GDP.
But what if the new emerging risk in the economy plays out to create a havoc. The inflationary pressure is already creating a higher interest rate environment globally. The US Federal Reserve is also expected to hike the interest rates this year in view of persistently high inflation. India, too, is witnessing higher retail inflation which is closer to the Reserve Bank of India's targeted level of 6 per cent.
In fact , the Economic Survey 2022 has also highlighted the threat of imported inflation, especially from the elevated global energy prices.
Given the investment push, the overall Budget pie has swelled from the revised estimate of Rs 37.70 lakh crore in 2021-22 to Rs 39.44 lakh crore in 2022-23. The government is using the continued buoyancy in tax collection and a higher-than-expected fiscal deficit target of 6.4 per cent of GDP in 2022-23 route to spend more next year.
Many market experts were actually expecting a lower fiscal deficit target for next year.
Clearly, there was an option available to the government in the current fiscal 2021-22 to reduce the fiscal deficit to 6 per cent or lower, but it has decided to settle at a slightly higher level of 6.9 per cent of GDP as compared to 6.8 per cent target in 2021-22. This increase in deficit, at a time when tax collections were buoyant, has helped the government to continue spending more.
These additional resources available to the government show up in the capital expenditure numbers. There is a whopping 42 per cent increase in capital expenditure as per the revised estimate of 2021-22 as compared to Rs 4.23 lakh crore in 2020-21. The Union Budget 2022-23 has seen an increase of Rs 1.47 lakh crore to Rs 7.50 lakh crore in capital expenditure.
The fiscal deficit for 2022-23 has been pegged at a modest 6.4 per cent of GDP, which clearly hints that the government wants to continue using the fiscal space available to push investments in the economy.
“We appreciate the government for not being hemmed in by the neoclassical trap of fiscal conservatism and providing a very clear glide path for fiscal consolidation that is in sync with the economic realities,” says Sanjiv Mehta, President of FICCI.
Zarin Daruwala, CEO at Standard Chartered Bank strongly believes that the focus on capex will have a high multiplier impact and am optimistic that elevated Government spending will spur private sector investments.
The capital expenditure is actually expected to have a multiplier effect in the economy as private sector investments will also catch up at some stage in the near future. Anand Rathi, Founder & Chairman, Anand Rathi Group says that there is a greater emphasis on capital expenditure where it is expected to be increased by 35 per cent.
In addition, the Central Government has also allocated Rs 1 lakh crore for grants to states to support their capital expenditure. "In spite of higher allocation to capital expenditure, the fiscal deficit is likely to go down from 6.9 per cent in this year to 6.4 percent next year," says Rathi.
So far, it looks that the government will meet its fiscal consolidation glide path of 4.5 per cent fiscal deficit by 2025-26, but the risk still lingers on from high commodity prices, withdrawal of surplus liquidity, and higher inflation.
India's track record of fiscal consolidation has also not been encouraging in the last decade. The fiscal stimulus under the UPA government post the global financial crisis has seen fiscal deficit widening to over 6 per cent plus. Later, the NDA government also committed to reducing the fiscal deficit to 3 per cent of GDP, but despite oil advantage five years ago, the fiscal deficit remained at around 3.2-3.3 per cent level and then the pandemic struck, which further widened the deficit to an unimaginable level at 9 per cent plus.
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