'Budget has a gameplan premised on credible numbers'

'Increased allocations for MNREGA could have provided the much needed push to rural demand and consumption at a time when recovery continues to remain uneven.

Abheek Barua, chief economist, HDFC Bank, discusses Budget 2022-2023 with Prasanna D Zore/Rediff.com.

While everybody is praising the proposals listed in the Budget, doesn't it leave everything to market forces to create the multiplier effect in the economy?

The underlying macro-economic strategy behind this Budget is one of pump priming the economy through public investments, hoping that economic buoyancy would crowd-in private sector capex (capital expenditure).

The aim is to kick-start the investment cycle with multiplier effects on employment and income in turn addressing fragile consumption growth and uneven recovery.

Thus, instead of redistributive direct fiscal support, an investment-led growth remains the government's economic management mantra.

There are some direct measures to bring succour to the worst affected through the extension of the credit guarantee scheme by a year and an increase in the guarantee amount earmarked for the hospitality sector is a welcome move.

Moreover, the Budget does provide tariff protection to capital goods that feed a range of sectors from coal mining to power to footwear, textiles and food processing. This is accompanied by commitments of higher government procurement from local producers in areas like defence.

That said, the focus lies primarily on capex and the Budget has perhaps overlooked some key revenue expenditure like MNREGA.

What economic factors could possibly derail this multiplier effect bandwagon which is expected to be unleashed by the Rs 7.5 lakh crore allocation for capital expenditure?

There can be some legitimate questions about the capex strategy.

For one thing, absorption of funds allocated to projects has been a long-standing problem in India. The big question then is -- does the government have enough shovel-ready projects to absorb the allocated funds to make a difference in the near term?

Thus, effective implementation remains key for the success of delivering on the Rs 7.5 lakh crore capex target.

Moreover, the covid risk does continue to linger on and any future pandemic waves could have an impact on economic activity, revenues and the ability to push through a large capex programme, especially if it implies a greater need for further revenue expenditures (extension of free food programme, allocation for rural income support through PM-Kisan etc.).

How does the lowering of the MGNREGA budget by 25 per cent at Rs 73,000 crore augur for employment generation in rural India and hence rural demand and consumption?

The allocation to MNREGA been reduced by a good Rs 25,000 crore (Rs 250 billion) when demand for these jobs still exceeds supply and indeed there were suggestions of an urban employment guarantee.

Increased allocations for MNREGA could have provided the much needed push to rural demand and consumption at a time when recovery continues to remain uneven.

That said, the Budget seems to be providing a push to jobs through the multiplier channel of higher capex spending, particularly construction of roads, highways etc.

Despite there being no big-bang announcements in the Union Budget 2022-23, experts believe it has ticked all the right boxes. What has gone well for the finance minister and her team?

The Budget deserves a somewhat favourable verdict in that it has a gameplan premised on credible numbers. The fiscal deficit target of 6.4 per cent, prima facie, suggests that that the FM has grabbed some much-needed fiscal space to nurture the nascent recovery.

The bond market did signal its worries about the Union government's borrowing plans for FY23. You too, in your note, have cautioned about 10-year G-Sec yields breaching the 7 per cent mark.
Globally too, especially in the US, the Fed is going after taming inflationary expectations by tapering its bond buying programme and tightening interest rates.<
What kind of balancing act do you foresee the RBI playing going ahead to, on the one hand contain inflation, and also ensure there is enough credit lending happening?

Although with the large government borrowing programme and rising global interest rates, the 10-year yield is likely to come under pressure, the RBI is likely to continue with operation twists and send signals through auctions to try and keep a cap on yields.

It is true that the room for plain vanilla OMOs (open market operations) is likely to reduce as liquidity normalisation continues but with a somewhat favourable inflation trajectory expected in FY23 (inflation expected to moderate close to 5% in H2 FY23), the RBI is likely to only gradually tighten its policy tilting towards providing support for economic growth and credit.

We expect the central bank to embark on its rate hiking cycle only in the second half of the next fiscal.

While the actual fiscal deficit for FY22 is pegged at 6.9 per cent against the 6.8 per cent budgeted estimate for FY22, what kind of tax buoyancy is the government expecting to have estimated fiscal deficit for FY23 at 6.4 per cent of GDP?

The government's revenue receipts assumptions seem conservative with some room for an upside in FY23. The Budget assumes nominal GDP growth of 11.1% and we reckon it could be higher (at 12.5%) leading to higher tax collections.

Overall, the government has kept its gross tax to GDP ratio broadly unchanged at 10.7% in FY23 from 10.8% in FY22 RE (and 9.9% in FY22 BE).

Income tax buoyancy is budgeted at 1.24 in FY23 (vs 1.52 in FY22 RE) while corporate tax buoyancy is budgeted at 1.20 in FY23 (vs. 2.2 in FY22 RE).

Could you enlist the major takeaways and disappointments from this Budget?

The Budget has somewhat successfully managed to balance fiscal retreat and support for economic recovery and has not been tempted to 'over-consolidate'. The Budget is premised on credible numbers and has focussed on pushing infrastructure capacity for higher growth.

That said, instead of putting all its eggs in one basket, continued focus on rural and social welfare spending (especially in areas like health) was perhaps warranted to achieve more equitable growth in the near-term.

• Budget 2022