Union Budget 2022-23: Fiscal Consolidation To Be Gradual And Calibrated Process

India Ratings and Research (Ind-Ra) expects the Union Budget FY23 to (i) consolidate and strengthen the plan and contours set out in the FY22 union budget, rather than trying out new things, (ii) continue with the revenue and capital expenditure pattern of FY22 to provide stability and consolidation to the past/ongoing effort, and (iii) focus on aggregate demand with an aim to generate employment opportunities in areas/sectors that have disproportionately been impacted more by the COVID 19.

"Fiscal consolidation is therefore expected to be a gradual and calibrated process, and the necessary fiscal support that the economy needs will be available till the recovery acquires its own momentum,"India Ratings has said.

Supportive Fiscal Policy:

After the presentation of FY22 budget on 1 February 2021, the union government brought in two supplementary demands for grants. As a result, the revenue expenditure is expected to be INR3.0 trillion higher than the FY22 budgeted amount. Yet, Ind-Ra expects the non-interest and non-subsidy components of the revenue expenditure, which impact the direct demand in the economy, to be INR131 billion lower than the budgeted.

Direct demand in the economy not benefiting from the increased INR3.0 trillion spending needs some introspection on the part of the union government since the economic recovery is weak/uneven and needs active government support. Ind-Ra expects the size of the union government revenue expenditure in FY23 to be larger than the revised estimate of FY22, not only in nominal but also in real terms (inflation adjusted).

Reorientation of Government Capex:

Government capex is showing a rising trend. It increased to 2.5% of GDP as per the FY22 budget estimate, up from 2.2% FY21 revised estimate and 1.6% in FY20. However, given the high gestation period and cost overrun of large infrastructure projects, Ind-Ra expects the FY23 budget to accord priority to capex spending on rural infrastructure and/or infrastructure where the gestation time is short and projects are employment intensive.

According to Ministry of Statistics and Programme Implementation, 445 infrastructure projects out of 1,673 projects, where investment in each project is INR1.5 billion or more, had a cost overrun of INR4.38 trillion by end-November 2021.