Union Budget 2022-2023: A strong and promising message

While retail inflation is for the moment within the Reserve Bank of India's target Range, the risk of a burst of inflation cannot be ignored

The 2022-2023 budget presented by Finance Minister Nirmala Sitharaman is by far the most balanced, coherent and promising budget presented so far by the minister, putting the priorities right where they should be when it comes to capital expenditures and investment, with direct capital expenditure at Rs 7.5 trillion, representing a 35.4 per cent increase on a year-on-year basis.

While a planned fiscal deficit of 6.4 per cent of GDP might seem worrisome at first glance, this reflects the well-founded assessment that at this stage of recovery after the tremendous shock inflicted to economic activity by the pandemic, this is time for an extra booster to the economy — exactly along the orientations taken by most countries, starting with the European ones, the US or Japan.

This is even more the case when considering that a significant part of this planned deficit will be directed to the huge increase of investment in all the elements of the country’s infrastructure, from railways in a big way to container ports, from roads to renewable energy development, and support for development of electric vehicles. Important to note is the additional support for startups, which are a major hope and crucial factor in the technology and economic development of the country, contributing to reshape the business landscape.

The same applies to the increased resources allocated for expanding digitalisation and to health and education — which have been neglected for too long at a very heavy price for India’s long-term development.

The government is assuming leadership in the investments that will shape the economic and social future of the country, as there is no substitute for its role. It is doing so in a strong way, sending a clear signal not only domestically but also to the international business community, which will be relieved to see additional easing and facilitation of bureaucratic processes.

The private sector — domestic and foreign — should have some good reasons to get involved. This will be even more so as there have been no additional tax burden imposed on business or on individuals and no change with respect to Long Term Capital Gains.

The Modi government is seizing the moment on two fronts: Internally, this is the right time to capture the expectation and even impatience for a rebound to get the country out of the economic and social shock, the duress and the hardships brought by the pandemic.

Externally, in this context of geopolitical tensions between the US and China and of reassessment of sourcing bases and global supply chains, it is the right moment for India to send a clear signal that it is ready to accelerate its infrastructure building and thus to remedy even more actively to one major structural weakness that has hampered its economic growth and reduced its attractiveness as a potential supply chain hub to foreign investors.

Finance Minister Nirmala Sitharaman’s projection of a 9.2 per cent GDP growth for FY22 is bold but in the range of optimistic realism — barring any surge of a new variant of Covid disrupting activity again in India and rest of the world. There are however a few signposts to watch closely in the coming period: While retail inflation is for the moment within the Reserve Bank of India’s target, the risk of a burst of inflation cannot be ignored.

Another problem to consider is the execution capability of the government and its bureaucracy. This has been an endemic structural weakness reducing the efficiency and impact of the best laid plans and sometimes even wreaking havoc on them.

The Modi government has fared somewhat better than its predecessors on that aspect — but not always. The size and scope of the planned infrastructure development will test to the limits the reputation of a leader who is good at execution, which Modi had initially earned as the chief minister of Gujarat.

The author is Chairman of Smadja & Smadja Strategic Advisory, Switzerland