Budget FY22: FM Nirmala Sitharaman faces a tightrope walk

The National Statistical Office (NSO) has released the first advance estimates of national income, which it does ahead of the Union Budget in order to provide an input to the finance minister and help him/her do the fiscal math for the next one year. Now, whether the finance ministers really use the data provided by the first advance estimates and extrapolate it to project the full-year growth for the next fiscal or they use some other political considerations while giving the Budget projections is not yet established. But, in case it is truly an input for the 2021-22 Budget, then the numbers have shown the mirror to the government.

The data shows that on the supply side, only agriculture is estimated to register a positive growth of 3.4% in 2020-21. And, on the demand side, the real GDP has been supported by only an increase in government consumption expenditure in the current fiscal. All other heads have contracted. Private consumption is estimated to shrink over 5.5%, gross fixed capital formation, a barometer of investment, is likely to decline a sharp 14%. On the external front, exports are likely to shrink.

Added to that is household savings, which have faced the maximum brunt of the Covid-19 pandemic.

Covid-19 blow on economy

Finance Minister Nirmala Sitharaman is set to present her next Budget under such circumstances. Former Reserve Bank of India Governor D Subbarao, who as a finance secretary has closely worked for and observed the Budget making process, had recently said Sitharaman had “baptism by fire like no other finance minister before her”. And, she was facing an ironic situation like none of her predecessors. The Covid-19 pandemic has wreaked havoc to economies across the globe but India, with one of the world’s highest number of poor and a huge informal sector, which employs over 80% of workers and contributes anything above 60% to the GDP, has faced the maximum brunt.

Businesses have little confidence in the economy in such uncertain times. Therefore, they have scant plans of making fresh investments. Poor and middle-income groups have run through their savings amid the pandemic. Therefore, they have little incentive to spend. The only hope to revive both, going forward, is government expenditure. And, why Sitharaman’s Budget-making job has become more difficult than her predecessors is that she has to satisfy each section of the society this time around along with taking care of developmental expenses.

Change in tax mix

But the assurance from her to give a “Budget like never before” has rekindled hope among many. Each section of stakeholders has interpreted the statement as one which can help them come out of the pandemic impact. ‘Spend more’ appears to be the only mantra for the finance minister to lift the economy out of the morass.

The pandemic has not only dealt a severe blow to tax collection but it has also altered India’s tax-mix. Direct taxes have seen a decline as the income tax paid by companies and individuals has dropped sharply while the share of indirect taxes in the tax kitty has gone up. This is a direct blow to the government which has been advocating broadening of the tax base to bring more people, businesses in the tax net. According to independent estimates, the share of indirect taxes in the overall tax kitty has risen by over 55% while the decline in the share of direct taxes is over 25%.

While the government has somewhat taken care of the poor by providing free ration and businesses have got loan waivers and state guarantee, the middle class has suffered silently. A section within the government has suggested that the finance minister reduce their tax burden and put more money in their hands. India Inc has, in one voice, sought tax relief for individuals and corporates in the Budget. If that happens, the declining private consumption can get a boost, which in turn can revive businesses and create more jobs.

That said, economists have also suggested the government rationalise the goods and services tax and get away with the multi-rate structure.

Services sector, which has so far been the backbone of Indian economy has been hit below the belt. The advance estimate numbers suggest a deep contraction of over 21% in trade, hotels and communication. The sector will continue to suffer as long as the social distancing norms prevail. The demand has been to give tax relief to the sector and help it sustain itself till the economy recovers from the pandemic.

There has been a growing expectation in the market that the RBI would soon deploy measures to soak up excess liquidity. While the Yes Bank has suggested that the focus on supporting economic growth should now shift to fiscal reforms as part of the Budget 2021-22, a bunch of economists have also suggested the finance minister to forego fiscal restraints and increase capital expenditure on infrastructure, health and education.

In all, it is a difficult balance for the finance minister to strike. She will not only have to give projections for next fiscal year but her Budget is expected to set the tone for the next decade as India strives to be a $10 trillion economy by 2030.