Budget 2022: The growth-inflation gambit, says CRISIL MD & CEO Amish Mehta

The Indian economy is staging a gradual recovery, but the environment — both local and global — remains challenging given the upside risks to inflation.

Covid-19 is not yet defeated and rising global crude prices and changing monetary policy stance in the US have thrown new challenges. Plus, the ongoing recovery has not benefited everyone or each sector proportionately.

The Budget, therefore, needed to go beyond just being a statement on fiscal health, and roll out a strategy that addresses near-term vulnerabilities without losing sight of the need to push growth over the medium term.

It does so in a fair way.

There is incipient multiplier effect in the salutary 25 per cent increase in the Centre’s budget for capital expenditure next fiscal, and in the substantially higher allocation to states for the same purpose.

By focusing on infrastructure creation, the Budget is not only paving an upside to growth but also creating conditions for an early and sustainable pick-up in private sector investments.

Although large corporates have de-leveraged and are primed for investments, weak consumption demand and an uncertain environment are holding them back. The Finance Minister acknowledged as much in her Budget speech, but resisted from providing boost through direct distributive schemes.

Spending on subsidies and MNREGA is projected to go down next fiscal, while that on PM-Kisan is stable. On the other hand, the support to the vulnerable business segments was stepped up through extension and expansion of the ECLGS scheme for MSMEs, and increased allocation to PMAY and PMGSY. These will generate employment and, in turn, bolster private consumption.

A decisive lift to the consumption cycle remains tied to a broad-based pickup in economic activity. That is predicated on a significant abatement in Covid-19 infections.

As for the Budget math, it is premised on a very conservative 11.1 per cent nominal GDP growth projection for next fiscal compared with 17.6 per cent in the current fiscal. That, along with a trimmed divestment target of ~73,000 crore, pegs the fiscal deficit at 6.4 per cent of GDP.

We expect real GDP growth at 7.8 per cent and nominal GDP growth to be 12-13 per cent next fiscal, implying potential upside in tax collections, which is already visible in strong GST and direct tax numbers.

Given the many moving parts, expect adjustments to be made on-the-fly in this inflation-growth gambit.