The budget will need to strike a balance between capital spending and borrowing


The Indian government will present the Union Budget 2022-23 on February 1, 2022. Apart from giving the national accounts, the government will communicate its long-term agenda to several observers through the budgets. The big question facing policymakers is how to distribute spending fairly – given that Covid-19 has disproportionately affected small and medium-sized businesses and the lower strata of society, as the economy begins all just recovering and needs a fiscal boost. Meanwhile, the government must also try to appear fiscally conservative. Until that happens, let’s take a look at how various countries have operated on this political spectrum and what India can do.

At one end of the spectrum is China. In what it calls “common prosperity”, Beijing has clipped the wings of many high-flying giants, including internet conglomerates such as Tencent and Alibaba, food delivery app Meituan and carpooling app Didi. . In total, more than $1 trillion in shareholder value was lost in the crackdown.

In a rare international defense of government action, Chinese President Xi Jinping told the World Economic Forum’s online meeting that “the common prosperity we desire is not egalitarianism. We will first make the pie bigger and then distribute it properly through reasonable institutional arrangements. As the rising tide lifts all boats, everyone will receive a fair share of development, and development gains will benefit all of our people in a more sustainable and equitable way.”

It is a form of pseudo-budget, but it poses a problem. This allows China to pander to its gallery (a non-voting corporation), while the cost is borne by a few select investors and companies. (In addition to those mentioned above, international companies such as Microsoft, Apple and now Tesla, fearing legal action, have agreed to store data collected in China in that very country).

Now compare that to the other end of the spectrum, when Ronald Reagan, the US President in the 1980s, aggressively cut income tax rates for the wealthy. The deal was this: the cuts would give the wealthy more incentive to invest and build wealth, allowing them to spend more, create jobs, and raise the incomes of everyone else. This has been called “trickle down economics”, i.e. if there is more revenue at the top, more of it will eventually trickle down to the rest of the world. economy, making everyone richer than before.

The inherent assumption is that given a larger share of national output, the rich will distribute it fairly among all factors of production – land, labor, capital and risk. Unfortunately, history does not bear witness to this, even remotely.

India operates somewhere in the middle of this spectrum. He had cut corporate taxes in August 2019 in hopes of boosting investment. Since the onset of the pandemic, however, the government has had to provide for the economically weaker sections, while ensuring that the systematic transfer of wealth from the unorganized sector to the organized sector is contained (as evidenced by the ratio record tax on nominal GDP). Finally, in the absence of business investment spending, the onus is on the government to also provide the fiscal stimulus for growth.

Let’s talk numbers then. For the first time in decades, tax collection will exceed budget estimates (by more than 20% or 3 trillion rupees). However, disposals will likely be insufficient, leaving an investable surplus of only half that amount.

Second, non-negotiable revenue expenditure (interest, grants and defence) accounts for almost 70% of revenue, leaving the government with a discretionary surplus of only Rs 8 trillion. Social expenditure (education, health, water supply, housing and labor and rural employment), totaling over Rs 2 trillion, is likely to increase by 20% this year. In addition, we have an additional revenue expenditure of Rs 16 trillion. In total, we are facing a revenue shortfall of Rs 10 trillion.

This is primarily capital expenditure of Rs 5-6 trillion. The budget deficit then climbs to Rs 15-16 trillion, of which we finance a third (Rs 5 trillion) from small savings and the rest from borrowing.

A grim scenario, one might think; the government has no leeway. Well, it’s true, but more than Rs 180 trillion worth of projects are waiting to be executed, and it’s time to act. Strong economic growth follows strong capital spending and given that private companies are still timid in terms of capital spending, we are likely to see budgeted capital spending increase by more than 20% this year (vs. 30 % last year). This does not even take into account some populist movements given that it is a busy election year.

Well, can’t you borrow more? Well yes, but it has costs (crowding out private investments, higher interest rates, downgrade risk, etc.), but that’s what it could end up being. Finding alternative avenues to finance capital expenditure could be one way forward (such as REITs, InvITs, IDFs or private equity), but given the numbers, it seems the government is unlikely to target a ambitious fiscal consolidation (and will instead choose a steeper path in the run-up to FY26, as promised last year).

Given the constraints, it will be an interesting budget. However, after reading this, if you are wondering if I came here only to find out whether the STT tax (securities transaction tax) and LTCG tax (long term capital gains) are going to be reduced, please allow I would like to direct your attention to the China example at the beginning of the column and say that “in a budget, numbers matter, but perception matters more”.


(The author, Jigar Mistry, is co-founder of Buoyant Capital. Opinions are his own)

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