EU Budget 2022: Government could prioritize investment spending over fiscal consolidation

As Nirmala Sitharaman prepares to present the Union budget – his fourth – on Tuesday, the finance minister will be reassured that India’s economic growth is improving. The economic study, tabled in Parliament on Monday, projects GDP growth of 9.2% in 2021-22 and 8.0-8.5% for next fiscal year.

Yet there are challenges that cannot be ignored – from unemployment to slowing consumer spending, especially on the mass market side, and lackluster private sector investment. The lingering uncertainties and risks around Covid-19 also remain a speed bump.

In this context, increased spending, whether on infrastructure projects or social protection schemes, should also remain high on the budget agenda this time around.

“Given the rise in Covid cases, we believe policymakers will need to strike a balance between boosting rural demand and investing in infrastructure while continuing on the path of fiscal consolidation to maintain the macro stability,” said Santanu Sengupta, senior Indian economist at Goldman. Sachs.

In the previous budget, Sitharaman targeted capital expenditure of Rs 5.54 lakh crore for the financial year 2021-22. This is a 26% increase from revised estimates of Rs 4.39 lakh crore in 2020-21.

This year, although there is likely to be a decrease in the allocation for Covid-related spending, the focus will continue to be on social spending, and capital spending will also increase by 12%, estimates Sengupta.

The economic study noted that the challenge is to significantly increase investment in infrastructure. In the fiscal years 2008-2017, India invested $1.1 trillion in infrastructure. But now it will have to spend $1.4 trillion if it wants to reach GDP of $5 trillion by 2024-25, he said.

Roads, railways and defense will continue to be priority areas where government spending will remain high, economists say. Spending on health infrastructure is also expected to see a further increase, due to the pandemic.

Sunil Kumar Sinha, Senior Economist at India Ratings and Research, noted that government investment has been on an upward trend in recent years – 1.6% of GDP in 2019-20, 2.2% of GDP in 2020-21 and 2.5% in 2021 -22.

However, given the longer gestation period and cost overruns of major infrastructure projects, he expects the budget to prioritize investment spending in rural infrastructure and/or infrastructure where the gestation period is short and the projects highly employment-intensive.

Indeed, unemployment is a major challenge facing the government. According to data from the Indian Economic Monitoring Center, India’s unemployment rate hit 7.91% in December, down from 7% in November.

This, coupled with the rising cost of goods, has also impacted consumer demand, particularly in rural areas and among low-income households as such. Consumption accounts for up to 55% of GDP.

Private consumption in India was slowing down even before the pandemic. As the rating agency CRISIL pointed out, per capita consumption growth fell from 6.8% in 2016-17 to 4.4% in 2019-20, then contracted sharply by 10, 1% in 2020-21.

Since then, the catch-up has been slower than for the other demand components of GDP. DK Joshi, Chief Economist and Dipti Deshpande, Senior Economist at CRISIL, estimate that it would not even have reached 2018-19 levels by the end of the current fiscal year.

Wage growth has also been tepid. Data from the Reserve Bank of India showed that agricultural wage growth in nominal terms between April and November 2021 slowed to an average of 5.7% from an average of 6.6% in 2020-2021. Growth in non-farm payrolls halved, from 6.4% to 3.2% over the same period.

Over the past year, companies from automobiles to fast-moving consumer goods have repeatedly raised prices following a surge in global commodity prices and supply-side shortages.

In fact, inflation in the essential category of food, fuel, rent, clothing and health for the three years of this fiscal year has averaged 180 basis points, higher than three years ending in fiscal year 2019, CRISIL economists noted.

This has eroded consumers’ purchasing power, which has resulted in slower volume growth of FMCG products in rural markets as well as reduced demand for two-wheelers.

In this context, employment and wages are two crucial areas which the Minister of Finance will have to look into.

“With the pandemic affecting low-income segments the most, short-term measures to support incomes and private consumption are crucial to strengthen the gateway to the medium-term growth trajectory. Delaying a strong fiscal correction to make room to boost employment and infrastructure spending is probably the best bet at this stage,” Joshi and Deshpande said.

A notable factor is that direct and indirect tax collections so far this year have been very strong (revenue collection from April to November was 76% of the budgeted estimate). This will help the government increase spending, while fiscal consolidation should only be gradual. Largely, economists see Sitharaman aiming for a budget deficit in the range of 6.0% to 6.4% next year, down from 6.8% this fiscal year.

“We expect the Union budget to continue to support growth over fiscal consolidation by continuing to focus on capital spending, rural development, pandemic-related healthcare, support for micro, small and medium enterprises, measures to boost green energy and public welfare spending. “said Shanti Ekambaram, Group President – ​​Consumer Banking at Kotak Mahindra Bank.

Sadaf Sayeed, CEO of Muthoot Microfin, believes that the government could announce another round of PM Kisan Samman Nidhi (a program to provide minimum income support to small and marginal farmers) and could also allocate more to the National Food Guarantee Scheme. rural employment to give development projects and employment in rural areas a boost.

No major changes are planned for personal income tax. However, analysts say there could be some increase in deduction limits, which will mean more disposable income in the hands of consumers.

Sinha of India Ratings expects the Union government to review the taxation of petroleum products to mitigate its negative impact on the economy and households in the budget.

Even though tax collections have been robust, the government is likely to miss its Rs 1.75 lakh crore divestment target even if the Life Insurance Corporation’s mega IPO rolls around this year. Several other divestments, including the sale of shares in BPCL and the privatization of two public sector banks and a general insurance company, have been postponed. Thus, divestment targets for next year will be closely monitored.

Government borrowing is expected to remain elevated in the range of Rs 12.5 lakh crore to Rs 13 lakh crore this year amid this backdrop.

“The economic study has set the context for the budget that will be released tomorrow. He believes that the next budget faces acute political trade-offs between sustaining a nascent growth recovery and shrinking fiscal space with challenging debt dynamics,” said Madhavi Arora, Chief Economist at Emkay. GlobalFinancial Services.

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