Budget 2022: Ringfence Capex From Pandemic Uncertainty

The Union Budget for FY2023 is being prepared under the shadow of the third wave of the Covid pandemic in India. This wave is expected to be shorter in duration and relatively less disruptive, owing in part to the better preparedness of the health sector, governments as well as households. 

FY2023 is expected to be a year when the momentum of economic activity stabilises, and monetary policy switches gears to inflation management from growth support.  Accordingly, we believe that the upcoming Budget should focus on growth-supportive capital spending. If the situation warrants a sharp step up in social sector spending, this can subsequently be provided vide a mid-year supplementary.

For FY2022, we expect the Government of India’s (GoI’s) fiscal deficit to overshoot the budgeted target, chiefly on account of a likely miss in disinvestment. Looking ahead, while direct taxes and GST are expected to report a healthy expansion in FY2023, the excise relief provided recently would constrain the growth in the overall gross tax revenues of the GoI. Moreover, with crude oil prices having risen sharply, the need for a further cut in cesses on fuels can’t be ruled out at present. 

We estimate the GoI to target a capital expenditure of Rs 6.0 trillion in FY2023, entailing a monthly outgo of Rs 500 billion each. Incidentally, this threshold has been achieved in only four of the 32 months since April 2019. 

Apart from core infrastructure sectors such as roads, highways and railways, logistics can be a key focus area to ease transportation costs and reduce the elevated logistics across the country. In addition, the government may consider providing a push to affordable and rental housing in the upcoming budget. With improved profitability and asset quality, the regulatory and growth capital requirements for public banks are negligible and the GoI is unlikely to budget capital allocation for FY2023. 

Apart from vaccine expenditure, there is a need to enhance health infrastructure spending in FY2023, to combat any potential health crisis in the future, and improve the confidence of economic agents.  

We expect the GoI’s fiscal deficit to decline to Rs 15.2 trillion or 5.8 per cent of GDP in FY2023 from Rs 16.6 trillion or 7.1 per cent of GDP in FY2022, presuming that the flows from the LIC IPO will be garnered in the coming fiscal. 

Moving on to the state governments. The looming concern is how different states will adjust to life after GST compensation ceases. The original five-year transition period for which the state governments are to receive such compensation, is coming to a close at end-June 2022. On a cash flow basis, we foresee a sharp step down in the compensation amount that the states will get in FY2023 relative to FY2022. 

However, we estimate that the tax devolution to the states will expand by a robust 16.4 per cent to Rs 8.6 trillion in FY2023. This is appreciably higher than the 9.3 per cent growth forecast for the GoI’s gross tax revenues, as the component of cesses on fuels that are expected to contract in FY2023, is not shared with the states. The enhanced tax devolution will help to soften the blow related to the dip in the GST compensation flows. 

For FY2023, the 15th Finance Commission had recommended a normal borrowing limit of 3.5 per cent of the Gross State Domestic Product (GSDP) for the state governments, which has been accepted by the central government. We expect that the planned ceasing of GST compensation could cause the state governments’ fiscal deficit to rise to the cap of 3.5 per cent of GSDP set by the 15th Finance Commission, from an estimated 3.3 per cent of GSDP in FY2022. It may also allow the states to prioritise capital spending, complementing the GoI’s efforts.

The author is Chief Economist, ICRA