As Nirmala Sitharaman gets ready to present the Union Budget—her fourth—on Tuesday, the finance minister will be comforted that India’s economic growth is looking up. The Economic Survey, tabled in the Parliament on Monday, has projected GDP growth in 2021-22 at 9.2 per cent and in the 8.0-8.5 per cent range next financial year.
Yet, there are challenges that can’t be ignored – from unemployment to slow consumer spending, especially at the mass-market end, and lackluster investments from the private sector. Continued uncertainties and risks around Covid-19 also remain a speed bump.
In this backdrop, boosting spending, be it on infrastructure projects or on social welfare schemes, is expected to remain high on the agenda in the Budget this time around too.
“Given the backdrop of rising Covid cases, we think that 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 macro stability,” said Santanu Sengupta, senior India economist at Goldman Sachs.
In the previous Budget, Sitharaman targeted capex spends of Rs 5.54 lakh crore for the 2021-22 financial year. This was a 26 per cent increase over the revised estimates of Rs 4.39 lakh crore in 2020-21.
This year, although there is likely to be decreased allocation to Covid-related expenses, there will be a continued focus on welfare spending, and capex will also go up 12 per cent, estimates Sengupta.
The Economic Survey noted that the challenge is to step up infrastructure investment substantially. During financial years 2008-2017, India invested $1.1 trillion on infrastructure. But, now it will have to spend $1.4 trillion if it is to achieve the GDP of $5 trillion by 2024-25, it said.
Roads, railways and defence will continue to be the thrust areas where government spending will remain high, say economists. Healthcare infrastructure spending is also expected to get a further boost, on the back of the pandemic.
Sunil Kumar Sinha, principal economist at India Ratings and Research, noted that government capex has seen a rising trend in recent years – 1.6 per cent of GDP in 2019-20, 2.2 per cent of GDP in 2020-21 and 2.5 per cent in 2021-22.
However, given higher gestation period and cost overrun of large infrastructure projects, he expects the Budget to accord priority to capex spending on rural infrastructure and/or infrastructure where the gestation time is short and projects are employment intensive.
Indeed, unemployment is a big challenge ahead of the government. According to data from Centre for Monitoring Indian Economy, India’s unemployment rate touched 7.91 per cent in December, up from 7 per cent in November.
That, coupled with rising cost of goods, has also had an impact on consumer demand, especially in rural areas and among the low-income households as such. Consumption makes up for as much as 55 per cent of the GDP.
Private consumption in India was slowing even before the pandemic. As pointed by ratings agency CRISIL, on a per capita basis, consumption growth slipped from 6.8 per cent in 2016-17 to 4.4 per cent in 2019-20 and then contracted sharply by 10.1 per cent in 2020-21.
The catch up since then has been slower than for other demand components of GDP. DK Joshi, chief economist and Dipti Deshpande, principal economist at CRISIL, feel it would not even have sighted 2018-19 levels, by the end of the current financial year.
Wage growth has also been tepid. The Reserve Bank of India data showed farm wage growth in nominal terms between April-November 2021 slowed to an average of 5.7 per cent from an average of 6.6 per cent in 2020-2021. Non-farm wage growth halved to 3.2 per cent from 6.4 per cent in the same period.
Over the last year, companies, from automobiles to fast moving consumer goods, have raised prices several times in the wake of a surge in global commodity costs and supply-side shortages.
In fact, inflation in essential category of food, fuel, rent clothing and health for the three years through this fiscal has been 180 basis points on average, higher than for the three years ending financial year 2019, noted the CRISIL economists.
This has eroded purchasing power of consumers, reflected in slowing volume growth for FMCG products in rural markets as well as the reduced demand for two-wheelers.
In this backdrop, jobs and wages are two crucial areas the finance minister will have to address.
“With the pandemic affecting low income segments the most, near-term measures to support incomes and private consumption are crucial to strengthen the bridge to the medium-term growth path. Delaying a sharp fiscal correction to make room for boosting employment and infrastructure spending is probably the best bet at this juncture,” said Joshi and Deshpande.
One notable factor is that direct as well as indirect tax collections so far this year have been very strong (April-November revenue collection was 76 per cent of budgeted estimate). That will help the government push for higher expenditure, while fiscal consolidation is only expected to be gradual. Largely, economists see Sitharaman targeting a fiscal deficit in the 6.0 per cent to 6.4 per cent range next year, compared with 6.8 per cent this fiscal.
“We are expecting the Union Budget to continue to support growth over fiscal consolidation by continued focus on capital expenditure, rural development, pandemic-related healthcare, support to micro, small and medium enterprises, measures to boost green energy, and spends on public welfare,” said Shanti Ekambaram, group president – consumer banking at Kotak Mahindra Bank.
Sadaf Sayeed, CEO of Muthoot Microfin, feels the government may announce another round of PM Kisan Samman Nidhi (a scheme to provide minimum income support for small and marginal farmers) and may also allocate more to the national rural employment guarantee scheme to give development projects and employment in rural areas a boost.
No major changes are expected on personal income tax front. However, analysts say there could be some increase in the deduction limits, which will result in higher disposable income in the hands of the consumers.
Sinha of India Ratings expects the Union government to take a relook at the taxation of petroleum products to ease its adverse impact on the economy and households in the budget.
Even as the tax collections have been robust, the government is likely to miss its divestment target of Rs 1.75 lakh crore, even if the Life Insurance Corporation’s mega IPO goes through this year. Several other divestments, including the share sale in BPCL and privatisation of two public sector banks and a general insurance firm, have been delayed. So, the divestment targets for next year will be closely eyed.
The government’s borrowings are expected to remain high in the range of Rs 12.5 lakh crore to Rs 13 lakh crore this year, in this backdrop.
“The Economic Survey laid out the background for the budget to be released tomorrow. It reckons that the upcoming budget faces acute policy trade-offs between nurturing a nascent growth recovery and diminishing fiscal space with challenging debt dynamics,” said Madhavi Arora, lead economist at Emkay Global Financial Services.
