Union Budget 2022: Through layperson's prism

In February 2021, Union FM Nirmala Sitharaman had hinted that the Budget would set the tone for the next decade. In this year’s Budget, she is two and a half steps ahead -- drafting the blueprint for the next 25 years. It focuses on laying the foundation of the world’s fastest-growing economy over Amrit Kal of next 25 years -- from India at 75 to India at 100.

On television channels, the corporate honchos and industry body bosses were gushing over the short 90-minute Budget’s boldness and all other marvellous ingredients such as focus on recovery, relief to the stressed sectors, and, of course, reforms.

It has packages for relief to the stressed sectors. The Emergency Credit Line Guarantee Scheme (ECLGS), which, first announced in 2020 with the onset of the pandemic and got extended many times both in terms of including more sectors for relief and more money to be spent, has been stretched yet again. It is extended by one more year till March 2023 even as the guaranteed cover has been expanded by Rs 50,000 crore to Rs 5 trillion to help micro, small, and medium enterprises.

The government seems to be determined to change the shape of recovery from K; it wants all to join the party in the world’s fastest-growing economy.

That’s a great story. How will it be done? Well, by extending spending.

Yes, the capex outlay for FY23 has been expanded from Rs 5.5 trillion to Rs 7.5 trillion – around 2.9 per cent of GDP. Simply put, the government will be doing the heavy lifting to pump prime Asia’s third-largest economy, which has already crossed $3 trillion.

Where will the money come from? The disinvestment target next year is just Rs 65,000 crore, roughly one-third the current year’s unachievable Rs 1.75 trillion. It’s a sensible estimate. So, the money will have to come from the market.

Gross borrowing in FY23 is Rs 14.95 trillion (after the so-called switch of certain papers, it’s Rs 14.31 trillion) – a historic high. The current year’s gross borrowing has been Rs 21.05 trillion. Net of redemption, net borrowing will be Rs 11.186 trillion versus the current year’s Rs 9.348 trillion – again, a historic high. The Budget is silent on getting India into the global bond indices. This means, largely the banking system will have to bear the brunt of raising so much money.

Though the impact of the pandemic is likely to recede this year, higher borrowing will remain a way of life after this borrow-and-spend inflationary Budget. Incidentally, Rs 1 trillion of the proposed Rs 7.5 trillion capex will be handed over to the states to spend.

The Budget is also quiet on cryptocurrencies but a tax on all digital money transactions will dampen the spirit of crypto enthusiasts. Also, the central bank digital currency will make its appearance in FY23, backed by the blockchain technology, the selling point of the cryptocurrency lobbyists.

Following the growth-oriented Budget, inflation rates will rise and so will interest rates. A focus on capex will prop up credit offtake but, for the investors, the cost of money will rise. Higher government borrowing will crowd out corporate and retail borrowers and raise the so-called hurdle rate. After the Budget, the yield on 10-year paper on Tuesday rose to 6.88 per cent briefly, the highest since September 2019.

Enthused by the growth push and promise of higher spend, the equity market gave the thumbs up to the Budget but once the interest rates rise, equity rally will also face a wall.

All eyes will be on the RBI next week when its rate-setting body meets.

Meanwhile, I have one naïve question. Are we treading on the post-FY2009 path? After the collapse of US investment bank Lehman Brothers Holdings Inc, which led to the global crisis, India chose to borrow more for growth, throwing fiscal consolidation to the wind. That had led to the current account crisis and the 2013 problem, accompanied by high inflation during the so-called taper tantrum in the US.

Now, after a 6.9 per cent estimated fiscal deficit (against 6.8 per cent) in FY22 and a projected 6.4 per cent deficit in 2023, what does this Budget signal? Of course, we are far better-off now on all macroeconomic parameters, including a pile of foreign exchange reserves. Still ... let’s wait to usher in the Amrit Kal.

The writer, a consulting editor with Business Standard, is an author and senior adviser to Jana Small Finance Bank Ltd.

Twitter handle: TamalBandyo