Budget 2022: Multiple trade-offs in fiscal objectives must be balanced

Our base scenario for real growth projections is 9.0 per cent in FY22 and 8.5 per cent in FY23. Our Axis Bank Composite Index “nowcasting” data indicate that economic activity has slowed in early January, but is now recovering. Together with our views on inflation, we expect the FY23 Union Budget to be based on a nominal growth rate of 13-14 per cent, which will determine the revenue and expenditure projections.

Yet, multiple trade-offs in fiscal objectives will need to balance.

The first is calibrating the fiscal deficit. It is now becoming increasingly evident that the recovery in FY22 has been concentrated onto the higher household income deciles and larger corporates. This calls for a fiscal re-distribution exercise and the forthcoming FY23 Budget is expected to address this. This will call for balancing expenditures between subventions as economic support for lower income and vulnerable households and capital expenditure which is essential for building the productive infrastructure and capacity needed for sustained growth.

Note that this balancing is constrained by the leeway that the Centre has in allocating expenditures. Forty-two per cent of the divisible pool of Centre’s revenues have to be devolved to states (although not all of this has actually been transferred). About 35 per cent of the total is “committed expenditures” on interest payments, salaries and pension outgoes. Another 15 per cent odd is “quasi-committed” to the re-distributive spends noted above.

A notable change in the budgets of the last couple of years has been a shift of expenditures toward capex. This will remain a focus area, given the need for ensuring that India’s “potential output” growth remains high, so that aggregate demand can increase without the economy overheating, requiring monetary policy tightening to cool inflation, neutralising some of the fiscal growth impulses.

In short, one of the key objectives of fiscal consolidation – given India’s high public sector debt, the benefits of a potential sovereign rating upgrade – will probably need to be moderate. Our base case for the fiscal deficit in FY22 is 6.4 per cent and 6.0-6.3 per cent for FY23.

The fiscal stance will need to accommodate imminent monetary policy normalisation. India will face tight external sector conditions, particularly in the US (although some relief can be expected from a likely China easing). Supply shocks are likely to keep inflation and costs elevated for some time. Fiscal policy will need to focus on sustained broad based growth while monetary policy keeps financial conditions stable.

(The author is Executive Vice President and Chief Economist, Axis Bank)

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