A takeaway is the good infrastructure push

News: Recently Union Budget 2022-23 has been released which has focused on expanding capital expenditure.

The article discusses the projected growth, revenue, expenditure, debt and real growth.

What is projected income growth?

Budget has projected a nominal GDP growth estimate of 11.1% for 2022-23. The real GDP growth is estimated of 8% with an implicit price deflator (IPD)-based inflation of 2.9%. It will deliver nominal growth of 11.1%.

But what could be real GDP?

According to NSO, real GDP in 2021-22 will exceed marginally from 2019-20 level. In the second half of 2021-22, real GDP growth was only 5.6% without any base effects. But the IPD-based inflation will be relatively high in 2022-23.

The reason of high IPD- based inflation is high wholesale price index in the first half of 2022-23 due to high prices of global crude and primary products. Hence, the real GDP growth will be around 7%-7.5% in 2022-23 with nominal growth assumption of 13% and IPD-based inflation will be 5%.

What is projected revenue and expenditure?

One, the Centre’s gross and net tax revenues are estimated to grow at 24.1% and 23.8%. However, the tax buoyancy has been reduced to 0.9. But the Centre’s tax buoyancy will be higher than 0.9 due to digitization and formalization of the economy.

Two, the total expenditure will grow by 4.6%. But the revenue and capital expenditures will grow by 0.9% and 24.5% respectively. This structural change will increase output and act as employment multiplier.

What is projected level of debt and fiscal deficit?

As per Economic Survey for 2021-22, the general government debt relative to GDP is close to 90% at the end of 2021-22 and 2022-23. The debt-GDP ratio will increase in 2022-23 which will cover major part of the Government’s revenue budget.

There will be reduction in fiscal deficit by 0.5% points and the target is to reach a level of 4.5% by 2025-26. This will result in reduction of 0.63% points in fiscal deficit per year in the next three years.

What are the other changes made in Budget 2022?

One, it incentivized States to expand capital expenditures by permitting a fiscal deficit limit of 4% of GDP. 0.5% is marked for expanding power infrastructure. Also, ₹1 lakh-crore has been allocated to States for capital expenditure in 2022-23 as 50-year interest-free loans.

Two, subsidies are reduced to 1.2% of GDP in 2022-23 from 1.9% in 2021-22 to reduce the burden of interest payments which has gone up from 3.5% in 2021-22 to 3.6% in 2022-23. Interest payments are also rising due to increased borrowings from the market.

What is the way forward?

First, there should be medium-term assessment of the National Infrastructure Pipeline (NIP) to indicate the sectors of deficient investment to increase transparency.

Second, Fiscal Responsibility and Budget Management (FRBM) Act should be re-examined to give the sustainable levels of debt and fiscal deficit and the adjustment path given the high debt-GDP levels.

Third, there is need to correct the under-assessment of tax buoyancy and nominal GDP growth assumption. It will increase fiscal space for raising expenditure.

Source: This post is based on the article “A takeaway is the good infrastructure push” published in The Hindu on 2nd Feb 2022.

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