Budget '22 - Key takeaways and the Road Ahead

I was just trying to get more information and details on how the Budget has been historically and what will/can likely happen tomorrow, the 1st of February. Found some interesting data:

Fiscal Consolidation

Fiscal consolidation refers to the ways and means of narrowing the fiscal deficit. A government typically borrows to bridge the deficit. It will then have to allocate a part of its earnings to service the debt. The interest burden will increase as the debt increases.

The actual fiscal deficit numbers for 2020-21 stood at 9.2 percent of GDP. The target for 2021-22 was at 6.8 percent of GDP which the Government of India is likely to meet.

However, the fiscal consolidation should be followed with a slow approach for FY23. FY23 fiscal deficit estimates are looked at around 6.4%.

Revenues

Corporate profits and taxes do form a notable part of the Government’s revenue and a major portion of the Government’s expenditure is financed through tax revenue. However, the annual divestment targets have almost always been missed by the Government.

The target for the current fiscal was Rs 1.75 trillion which may again not be met unless the LIC IPO gets completed in the next two months.

Indias Union Budget FY23 is likely to set a higher divestment target for the coming fiscal with more focus being set on the National Monetisation Pipeline (NMP).

Notably, the conclusion of the Air India divestment, as well as the upcoming listing of LIC, is expected to prompt the Centre for a robust divestment target for FY23.

Expenditure

Due to the pandemic, the effects of which still remain, and the elections that are lined up in 2022, these factors will mainly shape the budget. The elections may have an upper hand, making it a populist budget that needs to be balanced.

However, capital expenditure must be focused on as they create jobs at the base level and are long-term growth multiplier.

Borrowings

The fiscal deficit is around Rs 15-16 trillion, of which we fund a third (Rs 5 trillion) from small savings and the rest from the borrowings.

If you take a look at the data below, the majority of the Government’s borrowings are from small savings and market borrowings. Finding alternatives for borrowing could be one way to go like increasing the borrowings externally, private equities, or retail participation to fuel the capex.

Fiscal Deficit

Fiscal deficit, while increasing has an impact on inflation, however, fiscal support is still an important factor for the economic and public welfare.

For example, if the government spends more, it will help with growth but lead to demand-driven inflation. This may lead to changing monetary policy by cutting down on money supply/liquidity by hiking rates, which can again dampen demand.

The data shows that an increase in Fiscal Deficit has turned out to be positive most of the time for the economy.

Over the years

The Sheet

It would be notable to see how the budget turns out tomorrow and what all would be incentivized for the general public and how the ecnomy would be expected to perform in the next fiscal.

Source: DSP and CMIE

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