Union Budget 2022: Key measures govt must take to address demand-side issue

The country's annual financial exercise this year, comes at a juncture when the outlook on both, global and domestic growth is uncertain in the context of the pandemic trajectory

The prolonged Covid pandemic had a significant impact on economic activity in FY21 when the real GDP contracted by 7.3%. While the pandemic continued in FY22 with an intense second wave in Q1FY22 and a nascent third wave in Q4FY22, the economy has witnessed a revival with expected GDP growth in the range of 9-10% for the current fiscal, which highlights that the economic output has exceeded the pre-pandemic levels. What has driven the revival is robust growth in public capital expenditure and exports, the latter fuelled by the demand recovery in the developed economies. Private consumption demand, however, remains a weakness particularly from the rural areas and is still yet to come above the pre-pandemic levels. Although the agricultural output has been healthy during the pandemic period and a broad-based revival in the manufacturing sector has been in evidence in FY22, the services sector is clearly yet to witness an adequate revival particularly the largely contact intensive trade, hotels and transport sector which is estimated to have a shortfall of 8.5% compared to the pre-pandemic FY20.

Union Budget 2022 clearly comes at a juncture when the global as well as domestic growth outlook is uncertain in the context of the pandemic trajectory. Given the consistent fiscal and monetary support provided during the pandemic period, we believe that the focus of the current budget will be to rebuild and repair the economy, thereby facilitating the sustainability of a healthy growth over the medium term. In that context, the government needs to take certain measures to incentivise demand particularly in the mass market; one example in point is the lacklustre demand for 2Ws where the rationalisation in GST can improve affordability. The government may also consider similar adjustments to GST in the case of electronic goods and smart phones in particular which are expected to improve the digitization and the productivity in the economy.

The government has already increased its investment in infrastructure projects and this is reflected in the pickup in capital formation in FY22. However, the public capital expenditure needs to move up to a higher scale to generate more jobs and give a greater push to the construction sector. We therefore expect a higher outlay for the infrastructure sector in this budget. This is also likely to include the healthcare sector where there is a significant need to enhance capacity both by the government as well as through PPP route.

The production linked incentive (PLI) launched by the government last year has already covered 13 sectors with a gross outlay of Rs 1.97 trillion. This is set to lead to a fresh cycle of private sector investments over the next few years. The government has to ensure that the PLI schemes are well designed and an acceleration of the proposed investments in the sector which will enhance the job opportunities for highly skilled manpower resources.

Lastly, the government has to walk the fiscal tightrope and ensure that it has adequate resources for the necessary social and capital expenditure. What will be the key in FY23 is the ability to monetise the various government assets including the disinvestment in the proposed PSUs. Clearly, there will be a large gap in the target and the actual disinvestment target in the current fiscal unless the LIC IPO is completed by March 22. We believe that the government needs to show more urgency on the disinvestment and the monetisation front and have quarterly targets if it is keen to revert to the fiscal consolidation path over the next 2-3 years.

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The author is Group CEO, Acuité Group