As India emerges from the shadow of the Covid-19 pandemic with an ebbing third wave, Finance Minister Nirmala Sitharaman’s economic recovery strategy hinges on a sharp step-up in government spending which, in due course, is expected to spur private investment that has so far remained stalled.
This exclusive focus on capital spending is, in effect, a continuation of the previous year’s Budget but devoid of its high decibel reform push — asset monetization and privatisation of state-owned banks and insurance companies — which the government projected to position India in the post-pandemic world.
In a way, Finance Minister Nirmala Sitharaman has continued with the NDA government’s economic philosophy of fiscal rectitude, without any mention of privatization, disinvestment and asset monetization in her 90-minute speech. Despite an unprecedent economic distress which many surveys showed hurt the poor the hardest, the Budget persisted with government interventions on the supply side.
For ordinary income tax payers, there were no real takeaways other than some easing of compliances and a new I-T return system. And for the bottom of the pyramid that suffered income and job losses during the pandemic, the Budget did not offer any major support despite five states including Uttar Pradesh and Punjab going to polls.
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For 2022-23, Sitharaman has sharply hiked the capital expenditure budget by 24.47 per cent to Rs 7.5 lakh crore (compared with the Revised Estimate for 2021-22 at Rs 6,02,711 crore), which is almost 2.9 per cent of the GDP. Together with grants in aid for creation of capital assets (including MNREGA works), the effective capital expenditure for the next year is budgeted at Rs 10.67 lakh crore, 27 per cent more than the RE of 2021-22 at Rs 8.40 lakh crore.
This expenditure boost comes along with an increase in the state borrowing limit to 4 per cent of the GSDP. Sitharaman also allowed states to borrow up to Rs 1 lakh crore through 50-year interest-free loans to make capital investments. In 2021-22, the Centre had allowed states an additional Rs 15,000 crore for capital investment under a similar window.
This is classical Keynesian economics at play – at a time when the private sector is reluctant or averse to invest given poor demand conditions, the government is weighing in, and borrowing more to spend more.
Over the course of the next 12 months, such government spending is expected to crowd in private sector investment and help create jobs.
Despite providing a fillip to the economy through higher capital spending, Sitharaman has kept the fisc under control, a key metric that foreign investors and markets assess the Budget on. Not only did she ensure that the fiscal deficit target for the current year was more or less met (6.9 per cent of GDP against 6.8 per cent assumed in Budget 2021-22), she stayed on course, bringing it down by 0.5 percentage points in the next financial year.
While buoyant revenues during the current year helped the government retain its fiscal deficit target, it has come at a cost – Sitharaman had to trim subsidies and cut the allocation on the job guarantee scheme.
The Budget also provided clarity on key new economy sectors – for cryptocurrencies, it said income from transfer of digital assets would be taxed at 30 per cent and further proposed a 1 per cent TDS on transfer of payment; it announced a battery swapping policy that would enthuse the EV (electric vehicles) segment; and provided a roadmap for 5G rollout that would boost the technology and start-up ecosystem.
Sitharaman also extended the ECLGS (Emergency Credit Line Guarantee Scheme), a facility to provide collateral-free loans to small and medium enterprises, by another year and enhanced the credit line by Rs 50,000 crore to Rs 5 lakh crore. Unlike big companies which could borrow easily, MSMEs banked on this scheme during the pandemic, when the national lockdown and subsequent demand collapse, almost wiped them out of business.
Further, she also let companies start production by March 31, 2024 (the deadline was March 2023) to avail of the concessional 15 per cent corporate tax regime. This, she said, was an effort to establish a globally competitive business environment for certain companies.
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