The economic survey 2022 projects a growth of 8-8.5% in the financial year 2022-2. Hon’ble President Mr. Ramnath Kovind, while addressing the parliament had clearly put forward the priorities of the Government, which includes the empowerment of the rural India , empowerment of women, allocation of resources to farmers and underlined that India is heading towards one of the fastest growing economies in the world. The President also highlighted about the various steps taken by the Government for improving the infrastructure of the Country and pointed out the importance of increasing the budgetary allocation for defense activities.
The Covid 19, the once-in-a-century global crisis, had put the world economies on its knees, dragged the growth and escalated the government debts to a never that before level. Will the Union Budget 2022, being presented on February, 2022 by Mrs. Nirmala Sitharaman, have any magical jab to shot on to the weakened and strained arms of the Indian economy, as panacea to all the ills and odds the country is facing currently? Will be Budget bring any solace to the firms and households, which are being suffered due to the burning gas and oil prices and escalating food prices? Will the budget give more prominence to create more employment opportunities to the young population of India who are suffering from the fallen job markets? Will the budget give a pat on the back of industrial sectors such as tourism and automobile sector, which are expected to take a long road to recover from the Covid impacted degrowth? Or, will the Government give more prominence to reduce the mounting public debts by increasing the taxes? Will the Government reduce the public spending to match decreasing GDP? With the external debt Rs 419319 Crores and non-marketable internal debt Rs 1224772 Crores(Source: RBI time series publication), which is highest in the history of India, is good for the financial health of the nation?
Due to the questions mentioned above, the Union Budget 2022 is the much-awaited fiscal policy document , by individuals as well as corporates. The upcoming budget will give more prominence to debt induced funding to boost the economy with an intention to revive it by generating more employment opportunities. Inorder to mitigate the negative shock on demand that had caused due to Covid 19, the Government will be trying to limit the potential damage to the productive capacity of the nation, in view of the fact that a fiscal policy that provides an impetus to growth will lead to lower, not higher, debt-to-GDP ratios.
In view the unprecedented economic crisis and negative growth rate in previous quarter, there is every chance that the Government will give more prominence to the fiscal expansion funded through higher Government debts. In order to boost the growth of the economy of the nation, the budget may adopt the counter-cyclical fiscal policy, which enable the nation to spend more during the economic crisis. In ancient India, the kings used to build their humongous palaces when their country was facing severe economic crisis and famine. On face of it, that will remind us about the Nero, the Roman Emperor who was infamous for his personal debaucheries and extravagances, when his country was burning due to financial turmoil. Though the acts of Nero was counterproductive due to the nature of his spending on non-productive areas, the building of palatial complexes and enormous infrastructure by Indian Kings during the famine period make sense, as those were primarily intended to create more employment opportunities and thereby move the wheels of economy in its hard times.
There are two types of fiscal policy stance that are being adopted by economies of the World during the time of recession and recovery. One type of fiscal policy is pro-cyclical and other is counter-cyclical. In case of pro-cyclical fiscal stance, the Government will reduce the spending and increase the taxes during the contracting phase of economy, which will help them to reduce the burden of debt on the Government during the crisis period. During the expansionary or revival stage of the economy, the pro-cyclical fiscal stance will prompt the Government to increase the Government expenditure and reduce the taxes. The pro-cyclical approach further deepens the recessions and amplifies expansions, thereby increasing fluctuations in the business cycle. Whereas in the counter-cyclical fiscal stance, the government will increase its spending through debt funds and reduce the taxes with an intention to move the economic wheels of the nation, and aim to generate more funds to service the debts in future from the increased productivity and future taxes. The counter cyclical approach, softens the recession and moderates the expansions, thereby decreasing fluctuations in the business cycle.
Fiscal policy is a key determinant of growth acceleration of a country. Post Asian Financial Crisis (1997-98), the growth of Indian economy had slowed down to an average of 5.3 per cent in real terms during the period 1997-98 to 2002-03. Despite a fall in growth levels, an expansionary fiscal policy that focused on infrastructure spending was adopted by the Government. Government expenditure increased consistently during these years, which led to general government debt reaching record levels. The increased spending during the recession period had helped the economy to revive in a much faster pace and thereby reach the normal level sooner. The increase in productivity had helped the government to generate more taxes from the public and thereby reduce the debt levels.
The Government of India, in the Union Budget, may also try to adopt the counter cyclical policy by debt funding the economy during the crisis period for generating more employment opportunities. The counter-cyclical fiscal policy is necessary to smooth out the economic cycles during this pandemic driven economic crisis and the budget may vouch for slashing of the tax rates giving more push to the said policy measures. One Rupee spent during the recessionary period will have multiplier effect during the expansionary period and thereby give more returns in the form of higher productivity and taxes. In a country like India, which has a large workforce employed in the informal sector, counter-cyclical fiscal policy becomes even more paramount.
Though it is a difficult puzzle to solve, in the Union Budget, the Government may try to strike a balance between the inflation level and interest rates. In order to put more funds into the pockets of the suffering populace, the funds may be allocated in huge chucks to social welfare schemes such as MNREGA, Ayushman Bharath and other similar social welfare schemes. However, the availability of such easy money in the market may further escalate the inflation level to higher scales. So, the RBI will not be keen to further reduce the interest rate on loans to tame the inflation and keep it under control. Due to the higher rate of bank interest, the cash flow to the private sector may also get affected and that will result in lower employment level. At this juncture, the debt induced government expenditure will have a solid role to play. For an economy like India, where the infrastructure spending of the Government simultaneously boosts the performance of the Private Sector, the counter-cyclical stance, will work in a very positive manner.
So, in my opinion, the Union Budget 2022 will not have much surprises and may frown the faces due to increased infrastructure push rather than extending the free lunch. The aim of the budget will be to give a push to the ailing economy by heavy spending and thereby enable it to stand on its feet, on getting the early signs of revival.
Bijoy P Pulipra, LL.B, FCS, IP, RV
Senior Partner | Artis Law House