Therefore, there is concern about the growth in FY23 and beyond, and whether the momentum can be sustained. There are several headwinds that we are likely to face in FY23, the most important ones being high inflation, newer strains of the coronavirus, continued challenges on the consumption expenditure of households and micro, small and medium enterprises (MSMEs), unorganised sector stress and private sector investments.
Therefore, the key imperatives for the Union Finance Minister in the formulation of Union Budget 2022 has to be on three fronts – pump priming the economy through higher capex, supporting the households at the bottom of the pyramid that will address some consumption-related challenges, and supporting MSMEs and the unorganised sector through continued easy access to credit. The key measures that we look forward to in the budget are as follows:
A steep jump in capex allocation: Investment in large infrastructure projects covering roads and highways, railways, power, housing, urban transportation and special economic zones will boost short-term economic growth by creating employment as well as build the momentum for medium-to-long-term growth by boosting production efficiency and cost effectiveness. Highways have particularly shown good absorption capacity and a significant increase in budget allocation for this sector can provide quick returns.
Increased MGNREGA allocations: With a 0.8% decline in per capita real GDP in FY22 over FY20 and the pandemic’s greater impact on low-income households by way of higher health expenses and loss of income, it is important that the budget provides support to this segment of the population. A significantly higher allocation to the MGNREGA and front-loading of this additional allocation in the first half of FY23 will help in stimulating the consumption engine.
Higher allocation for village roads (PMGSY): This will have a dual impact in terms of job creation in rural areas as well as providing better market access for agricultural produce. It will also support the consumption engine.
Incentivising states to increase capital expenditure: In 2020–21, the Government provided an additional amount of INR 15,000 crore to states as an interest-free 50-year loan for spending on capital projects under the ‘Scheme of Financial Assistance to States for Capital Expenditure’. This scheme could be enhanced through further allocation and possibly tweaked by providing an amount matching the capex of states on specified, job-intensive projects like building roads and urban and rural infrastructure.
Higher funds for recapitalisation of public sector banks: The risk appetite of private sector banks will be low, given the uncertainties from newer strains of the virus. Public sector banks will need to step in to ensure that there is regular credit flow for those who seek it during periods of uncertainty. A higher recapitalisation will add to the ability of the public sector banks to increase the size of their loan book.
Guaranteed credit for MSMEs: Some recent studies have shown that several MSMEs were able to survive owing to the guaranteed credit scheme provided to them under the Government’s post-COVID support programme. The budget must provide for this scheme to be extended for another year and adequately allocate funds for the same.
Cash transfers to BPL households and food security support: The budget must provide for some limited cash transfers to the poorest households. The trinity of Jan Dhan, Aadhar and Mobile (JAM) has enabled the Government to engage in cash transfer and inform the recipients without any leakages. Additionally, the Government should also continue with the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) during the next fiscal to provide free ration to poor households who have been suffering due to the pandemic’s resurgence and the recovering economy.
Boosting employment through the housing and real estate sector: Construction activities, especially in the housing and real estate sector, can be supported through continuation of interest subvention on home loans, extension of tax holiday on profits from affordable housing projects, provision of larger tax benefits on home loans (especially for the mid segment), boosting rental housing through tax exemptions on rental income and allocating more funds for the Pradhan Mantri Aawas Yojana. This will create employment opportunities in both rural and urban areas, and also boost the demand for construction material.
Provide for a special GST compensation allocation conditional on the rationalisation of GST rates: The budget can also boost demand by allowing fiscal space to reduce GST rates, especially on items of mass consumption and products which are used as inputs in employment-intensive sectors. Rising input costs and supply constraints have been propelling inflation. Reduction in GST rates, especially for mass consumption products (12% to 5% for food products like fruit juices, dairy products like butter, ghee and cheese, sauces, ketchup, etc.; 18% to 12% for household products like hair oil, toothpaste and soap; and 28% to 18% for construction inputs like cement, marble and granite). This can spur more consumption that will possibly mitigate the revenue impact and simultaneously have a sobering effect on inflation. While GST rate rationalisation is not a subject matter for the union budget, but such an allocation could help in building consensus in the GST Council for such measures.
The Government had rightly undertaken smart stimulus measures during the first wave and not frittered away its limited resources in propping the economy when the entire country was under a lockdown. However, with the lockdown behind us and apprehension amongst most households still high, the economy needs real stimulus in FY23 and the measures outlined above will rev up the economic growth engine towards welcoming the private sector to join the growth party. We look forward to a stimulating budget from the Finance Minister!
(Ranen Banerjee, Partner and Leader – Economic Advisory Services, PwC India)