Union Budget Stays Focused On Demand-Side Push To Economy: IndiaRatings

Although the Economic Survey 2021-22 highlighted the importance of the supply-side measures/ reforms in the ongoing economic recovery and somewhat underplayed the importance of the demand-side management, the Union Budget FY23 has renewed its focus on demand side. Quite contrary to the India Ratings Research's (Ind-Ra) opinion, the union government, despite the tax plus non-tax revenue collection being higher by INR2.91 trillion than FY22BE, did not opt for a reduction of the fiscal deficit in FY22. In fact, it has increased the fiscal deficit to 6.9% of GDP and budgeted the FY23 fiscal deficit at 6.4%.

Expenditure Pattern- Focus on Capex

Although the size of the revised estimate (RE) of revenue expenditure of FY22 is INR2.38 trillion higher than the FY22 budgeted estimate (BE), that for FY23BE at INR31.9 trillion is only INR273.74 billion larger than the revenue expenditure of FY22RE. The bulk of the stepped-up expenditure in FY23BE has been allocated for capex. Grants-in-aid for the creation of capital assets and expenditure on the capital account together are INR2.27 trillion higher in FY23BE than the FY22RE. This indicates that the demand-side support to the economy that the government is attempting through capital expenditure.

As the private sector capex has yet not revived, the union government continues to do the heavy lifting and capex is budgeted to grow 24.5% in FY23 over FY22 (RE). Government capex as % of GDP is 2.9% in FY23BE compared to 2.6% in FY22RE. However, if we set aside the capital infusion/loans to AI Asset Holding Limited or the settlement of past guaranteed and sundry liabilities, then the government capex would come in at 2.4% of GDP. The capex is concentrated in eight ministries/ departments, with atomic energy accounting for 1.9% of the total capex, telecommunications 7.2%, defence 20.3%, transfer to states 14.9%, police 1.4%, housing and urban affairs 3.6%, railways 18.3% and road transport and highways 25.0%.

Capex on Large Infrastructure

Focus on capital expenditure is indeed good for enhancing the productive capacity of the economy, which will be beneficial in terms of not only sustaining but also accelerating the country's growth momentum. Given the long gestation period of large infrastructure projects, its benefit to the economy at large and employment opportunities in particular would be realised only in the medium to long term. However, in view of the COVID-19 pandemic and its impact on life/livelihoods/household income, it would have been better if the focus of the government capex would have been on infrastructure projects where the turnaround time is short and the projects are employment intensive. This would have put more money in the hands of households and supported the consumption demand which even in FY22 is expected to be lower than the FY20 level.