Union Budget 2022-23 - An update

An analysis of the Union Budget 2022-23

Union Budget 2022-23 - An update

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• The story: Finance Minister Nirmala Sitharaman presented the Union Budget for 2022-23 in Parliament. The budget had a strong growth-oriented streak, and focused less on fiscal consolidation. The FM stressed the “overall sharp rebound and recovery” of the Indian economy from the Covid-19 pandemic.
• First impressions: This optimism of the FM did not extend to the Budget’s numbers, which assumed that nominal growth in 2022-23 would be 11.1 per cent in spite of a global inflationary environment and the Economic Survey’s prediction of real growth above 8 per cent. The fiscal deficit for the current year, at 6.9 per cent of gross domestic product (GDP), narrowly missed the 6.8-per cent target despite a surge in some tax revenues. The FM has committed to reaching 4.5 per cent of GDP by 2025-26, while targeting 6.4 per cent in the coming year. Thus the fiscal consolidation glide path will have to steepen considerably – a task complicated by the increasing interest burden. Interest payments in 2022-23 have increased 16 per cent over the previous year’s Budget estimates, and an extraordinary 38 per cent since 2020-21. They now comprise 23.8 of the total expenditure, up from 19.3 per cent in 2020-21.
• Funding the expenditure: The government has finally reduced its dependence on the small savings fund, and expected net market borrowing of Rs.11.6 trillion in 2022-23, a sharp increase by Rs.0.87 trillion. The bond market reacted with concern to this higher-than-expected borrowing, and the absence of any tax reform designed to aid the inclusion of Indian government bonds in global indices. The yield on the benchmark 10-year bond rose 17 basis points to close at 6.85 per cent.
• Other assumptions: The Union government’s net tax revenue was expected to grow only 9.5 per cent; disinvestment receipts were set at only Rs.65,000 crore; earnings from Union excise duties were budgeted to decrease; and although the FM mentioned 5G spectrum auction in her speech, it was not clear if those receipts had been incorporated. The FM carefully controlled the revenue expenditure. In fact, exclusive of interest payments and grants to create capital assets, expenditure on the revenue account is budgeted to decrease a startling 29 per cent in 2022-23 over the revised estimates for 2021-22. Much of this is because of the expectation that some Covid-related support can be phased out. The three major subsidies of fertiliser, petroleum, and food are projected to decline by more than 26 per cent, and the Mahatma Gandhi National Rural Employment Guarantee Scheme by a similar proportion. This is quite surprising, as the employment scene remains dismal overall. New spending initiatives were thin on the ground.
• Capex, capex, capex: The fiscal space created by this expenditure crunch and slower-than-expected fiscal contraction has been utilised on further expanding capital expenditure, which Sitharaman said would be ~7.5 trillion and “more than 2.2 times the expenditure of 2019-20”. The Budget’s overall thrust was clearly on directing public investment to infrastructure and sunrise sectors, as opposed to addressing the welfare issues caused by the pandemic.
• Praises and criticism: Experts say that the government has performed creibly in collecting tax revenues amidst the pandemic. Gross tax revenue for the Revised Estimate (RE) of 2021-22 increased by over 13 per cent. Every head of tax performed exceptionally well. Despite local-level shutdowns, reduced working hours and supply chain constraints across many states, Goods and Services Tax (GST) revenue grew by 7 per cent. Receipts from corporation tax increased by 13 per cent; receipts from income taxes went up by 9.6 per cent; and Customs collections rose by 39 per cent. This buoyancy in a year where it was least expected has given the FM the fiscal space to increase the Budget Estimate (BE) of gross tax revenue by 9.6 per cent for 2022-23. But India is now far behind the 15-16 per cent tax-to-GDP ratio that is needed to raise sufficient revenues to simultaneously reduce the fiscal deficit and increase steady state growth to between 6.5 per cent and 7.5 per cent. The present tax-to-GDP ratio is 10.8 per cent and in 2022-23 (BE) it will actually fall to 10.7 per cent. India cannot have such a low ratio, maintain a high growth of capital expenditure – especially in critical infrastructure – and simultaneously expect to steadily progress to lower fiscal deficit to GDP ratios. FM needs to be congratulated on keeping tight control on revenue expenditure, which could have gone through the lid because of Covid-19. Total expenditure for 2021-22 (RE) is only 8.2 per cent higher than the corresponding BE. It could easily have been much more. This control will continue throughout 2022-23 with total expenditure slated to rise by considerably less than gross tax revenue. There is a clear and huge increase in capital expenditure, especially for roads, national highways and metro rail. Just one example on this account: For 2022-23 (BE), the National Highways Authority of India has got over ~1.34 trillion, which is more than double of what it will have received a year earlier. These infrastructure projects can be employment-intensive and can generate a large number of jobs to poor people. The disinvestment continues to fail badly. For 2021-22, the target was Rs.1.75 trillion. It will be very lucky if the govt. ends up at even half of that number.
• Key numbers: The total expenditure in 2022-23 estimated at Rs. 39.45 lakh crore, and total receipts other than borrowings in 2022-23 estimated at Rs. 22.84 lakh crore. Capital expenditure outlay hiked by 35.4%.

1. Fiscal deficit in current year: 6.9% of GDP (against 6.8% in Budget Estimates). Fiscal deficit in 2022-23 estimated at 6.4% of GDP
2. Direct Taxes: Provision to file an Updated Return on payment of additional tax. This will enable the assessee to declare income missed out earlier. No change in income tax slabs
3. Defence: 68% of capital procurement budget earmarked for domestic industry in 2022-23, up from 58% in 2021-22.
4. National Highways Network to be expanded by 25000 Km in 2022-23. Railways: One Station One Product concept to help local businesses & supply chains.
5. Banking: Scheduled Commercial Banks to set up 75 Digital Banking Units (DBUs) in 75 districts.
6. MSME: Emergency Credit Linked Guarantee Scheme (ECLGS) to be extended up to March 2023.
7. Scheme for taxation of virtual digital assets: Any income from transfer of any virtual digital asset to be taxed at rate of 30%.
8. Gems and Jewellery: Customs duty on cut and polished diamonds and gemstones being reduced to 5%. Customs duty of at least Rs 400 per Kg to be paid on imitation jewellery import. Customs duty on umbrellas being raised to 20%. Exemption to parts of umbrellas being withdrawn.
9. Tariff measure to encourage blending of fuel: Unblended fuel to attract an additional differential excise duty of Rs 2/ litre from Oct 1, 2022
10. Ken Betwa project: 1400 crore outlay for implementation of the Ken – Betwa link project.
11. Skill Development: Digital Ecosystem for Skilling and Livelihood (DESH-Stack e-portal) will be launched
12. Startups will be promoted to facilitate ‘Drone Shakti’ and for Drone-As-A-Service (DrAAS)
13. Education: ‘One Class-One TV channel’ programme of PM eVIDYA to be expanded to 200 TV channels.
14. Health: An open platform for National Digital Health Ecosystem to be rolled out.
15. Har Ghar, Nal Se Jal: Rs. 60,000 crores allocated to cover 3.8 crore households in 2022-23
16. Housing for All: Rs. 48,000 crores allocated for completion of 80 lakh houses in 2022-23 under PM Awas Yojana.
17. NE: New scheme PM-DevINE (Development Initiative for North-East Region) launched for the North-East.
18. Vibrant Villages Programme for development of Border villages on the northern border.
19. Accelerated Corporate Exit: Centre for Processing Accelerated Corporate Exit (C-PACE) to be established for speedy winding-up of companies.
20. AVGC Promotion Task Force: An animation, visual effects, gaming, and comic (AVGC) promotion task force to be set-up to realize the potential of this sector.
21. Digital Rupee: Introduction of Digital Rupee by the Reserve Bank of India starting 2022-23.
22. States: In 2022-23, States will be allowed a fiscal deficit of 4% of GSDP, of which 0.5% will be tied to power sector reforms.

• Summary: The Union Budget is focused on public capital spending in infrastructure creation to increase employment and capital formation for enhanced economic growth and development. Whether it leads to large-scale jobs generation or not, time will tell.
• EXAM QUESTIONS: (1) Explain the thrust of the Union Budget 2022-23. What is the government's goal? (2) Explain the top five numbers of this Union Budget, with potential implications. (3) If you were the FM, what would you do differently in Union Budget 2022-23? Explain.

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