Fireballs juggled well; brickwork laid for growth

When people have hope, you have a middle class.” The FY23 Union budget follows a simple rule: committed expenditure juxtaposed against sombre revenue projections. In essence, the total revenue of the Centre and states jumped by 2.8 trillion in FY22 and was counterbalanced by an expenditure jump of 2.9 trillion. Interestingly, of the 2.9 trillion increase, if we net out the excise duty collections, the increase was 1.7 trillion in FY22. In FY23, the increase in tax collections is at 1.6 trillion (expenditure increase at 1.7 trillion) is nearly equivalent to FY22 numbers. This shows the budgeted fiscal deficit at 16.6 trillion is a pragmatic assumption. Nominal GDP growth at 11.1% implies a tax buoyancy at 0.9, and it is likely that the government will possibly surpass its revenue projections. While a large part of growth in the March quarter may shift to June quarter of FY23 owing to Omicron, it is likely the FY23 GDP may beat the government’s real GDP projections at 8%, thus putting an upward bias on 11.1%.

If growth comes back riding on spending prowess, the nominal GDP projection may be an underestimate, thus providing additional spending room. Consider this: the story of the rise in household debt during the pandemic turned on its head with the National Statistical Office (NSO) data of 31 January. While total gross financial savings jumped by 7.1 trillion in FY21 (highest ever), total financial liabilities rose by only 18,669 crore. In the previous two fiscals, the cumulative gross financial savings rose by 8.5 trillion, while during the same period, financial liabilities increased by only 34,000 crore. The estimated household debt has now declined from 37.3% in FY21 to 34% in the first quarter of FY22 with the rise in GDP. The borrowings for FY23, however, are on the higher side. Gross market borrowing through dated securities has been budgeted at 14.95 trillion, and taking repayments of 3.1 trillion (adjusted for 64,000 crore switch announced recently), net market borrowing stands at 11.8 trillion (71% of fiscal deficit). This is much higher than historical trends and could pressure the bond market. At this level of net market borrowings, banks and insurance firms need to take an investment of close to 7.3 trillion. Even after such, RBI may still have to do an open market operation of 2 trillion to absorb the papers.

For FY23, with the ceiling of net borrowing at 4% of GDP and an additional 0.5% of GDP conditional borrowing by states announced by government, the net borrowings are pegged at 6.6 trillion, and gross borrowings are expected to come around 9 trillion after taking a repayment of around 2.4 trillion. Thus, the total gross borrowing of the Centre and states for FY23 comes to 24 trillion while net borrowing stands at 18.4 trillion.

If India’s bond inclusion comes through and GDP growth surpasses budget projections, the Centre may shelve its borrowing plan. Clearly, there is an element of surprise in the budget that could be a source of comfort for the bond vigilante. We also should interpret the borrowing numbers a little differently. This year the Centre has reduced the extra-budgetary resources even further, which was mobilized through the National Small Savings Fund (NSSF) and fully serviced bonds to nil, and the amount for FY22 has also been revised down to 752 crore from 30,000 crore in FY21BE. Thus, there has been a complete shift from off-balance-sheet borrowing. When we look at NSSF, the government has projected a net increase in the collection of 3.86 trillion in FY23 from the revised 3.59 trillion in FY22. Interestingly, when the investment of NSSF funds is looked at, investment in public agencies like Food Corp. of India and Building Materials and Technology Promotion Council has reduced to nil. PSU borrowing in FY23 is also 16% lower as borrowings by the National Highways Authority of India ( 60,000 crore) have been absorbed in the budget. This is a reflection of fiscal transparency.

Overall, we find remarkable similarity of the budget in Thomas Friedman’s 2005 book The World is Flat. The budget may have taken a cue from the sanguinity embedded immersive line above, which asserts that the middle class is a perpetual state of mind, not just numbers, ensuring diverse cross-sections of the population remain mobile and hooked to the path of continual upliftment in a self-replicating loop.

Elsewhere, the budget has rightly dubbed roads, railways, airports, ports, mass transport, waterways, and logistics as the growth engines on which the country’s future hinges. Overall, the budget has done well on juggling the innumerable fireballs while laying the brickwork for future growth in core and sunshine sectors and, simultaneously suturing the deep fault lines that would run parallel to our journey to build back better in a post-pandemic world.

(Soumya Kanti Ghosh is group chief economic adviser at SBI. Views are personal.)

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