Budget Survey 2022: Will FM Sitharaman loosen purse strings for growth, or will fiscal prudence hold her back?

Economists and experts said that it is crucial for the government to focus on striking the right balance between growth and fiscal consolidation.

budget 2022, budget expectations, budget survey, Nirmala Sitharaman, finance minister, fiscal consolidation, GDP growth, fiscal deficit, infrastructure, capex
It is crucial for the government to focus on striking the right balance between growth and fiscal consolidation. Image: Bloomberg

All eyes will be on Finance Minister Nirmala Sitharaman on Tuesday for the upcoming budget to clear clouds around India’s growth prospects and fiscal consolidation targets. Meanwhile, according to a survey conducted by Financial Express Online, economists and experts said that while growth will remain the focus for the government, India should not disregard consolidation. “boosting growth should be the primary priority of the budget,” Sujan Hajra, Chief Economist and Executive Director, Anand Rathi Shares & Stock Brokers, said. However, “fiscal consolidation should not be disregarded totally” for long term sustainability and financial stability, he added.

“India’s growth currently remains fragile, modest and volatile… A fiscal deficit to the tune of 5.5-5.8 per cent of GDP in FY23 and expenditure growth of 15-17 per cent could be a good middle ground,” Sujan Hajra said. Upasna Bhardwaj, Senior Economist, Kotak Mahindra Bank, believed that the government will focus on pushing growth, with focus on capex, exemptions and income support for the informal segments. At the same time, she said, “… prioritisation of expenditure should be key as excessive fiscal profligacy may prompt unsustainably high inflationary pressures.”

An either-or situation?

Maintaining the right balance between boosting rural demand and investing in infrastructure is crucial, while continuing on the path of modest fiscal consolidation. This especially with the ongoing Omicron surge and US raring to go in the form of the Federal Reserve’s aggressive monetary policy tightening.

According to a report by Morgan Stanley, Union Budget 2022 will focus on gradual fiscal consolidation while pushing public capex, creating a conducive environment for private capex, and raising resources via strategic divestments. Rahul Bajoria, Chief Economist, Barclays, agreed, “We do think that there is a priority of growth, but definitely not at the expense of fiscal. Without growth, fiscal consolidation itself will be very difficult. Trying to separate the two means that we either have to cut spending or increase taxes. So we reckon that the strategy of trying to revive growth in order to get longer term fiscal discipline and organic improvement in taxes or through reduction in welfare spending going forward, is the right strategy.”

Keeping public debt in check

Also, it is important that the budget strikes a balance between the two in order to keep a check on public debt, which is now around 90 per cent of the GDP. The Economic Survey 2021 had argued that growth leads to debt sustainability in the Indian context but fiscal austerity does not necessarily foster growth. It had maintained, “This is because the interest rate on debt paid by the Indian government has been less than India’s growth rate by norm, not by exception.” However, with the interest rate rising due to high inflation, the growth rate has to be higher once the economy normalises.

Will India meet its commitment towards fiscal consolidation?

While it will be clear on 1 February 2022, the Financial Express Online survey received a mixed view on whether the country will meet its commitment towards fiscal consolidation. The fiscal deficit is pegged at 6.8 per cent in 2021-22. The government has targeted to reach a fiscal deficit level below 4.5 per cent of GDP by 2025-2026 with a fairly steady decline over the period.

Madhavi Arora, Lead Economist, Emkay Global, said, “The fiscal trends appear to look just about balanced with the central government poised to print the budgeted target of 6.8 per cent fiscal deficit/GDP, despite various push and pull. We expect revenues to surpass budget estimates amid strong nominal growth in FY22 and are likely to continue to do so in FY23.

Aditi Nayar, Chief Economist, ICRA, said, “Based on our expectation of the LIC inflows spilling over to FY2023, we expect the GoI to report a fiscal deficit of Rs 16.6 trillion or 7.1 per cent of GDP in FY2022. To maintain the budgeted target of a fiscal deficit of 6.8 per cent of GDP, the fiscal deficit can go up to Rs 15.8 trillion, as compared to the budgeted Rs 15.1 trillion.

The path to limit fiscal deficit at 4.5% of GDP by FY2025-26

Deepak Jasani, Head of Retail Research, HDFC Securities, said, “Covid has resulted in the government exceeding the budgeted fiscal deficit for FY20 and FY21. Even in FY22 and FY23, the fiscal deficit target may be much above the fiscal consolidation path. The Govt is likely to reduce the fiscal deficit to 4.5 per cent of GDP by 2025-26. FY23 budget will contain medium-term macroeconomic projections and will include revised Fiscal Responsibility and Budget Management Act (FRBM).”

The finance minister, last year, had maintained that the government will continue with the path of fiscal consolidation, and that it intends to reach a fiscal deficit level below 4.5 per cent of GDP by 2025-2026. And considering the results shown by the government in the last two years in meeting the fiscal consolidation path, it is to be seen if there will be some tangible measures in order for the government to follow the fiscal consolidation path of 4.5 per cent of GDP set by the government for 2025-26.

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