Opinion: Union Budget FY22 Attends to Demand-Side Concerns

Against the backdrop of a COVID-19 battered economy, the Economic Survey 2020-21 called for a counter-cyclical fiscal policy and advocated that the fiscal policy will have to remain at the center-stage to support growth at least in the near term. Once growth picks up in a sustainable manner, fiscal consolidation can return as a key agenda. The Union Budget for FY22 presented by the Finance Minister did live up to this suggestion and the fiscal deficit of FY22 is budgeted at 6.8% of gross domestic product (GDP). Even for FY21, the fiscal deficit is pegged at 9.5% of GDP as against the budgeted 3.5%.

Expenditure is on Essentials: Throughout FY21, saving lives and livelihoods had been a key theme of policymaking. The revised estimate (RE) of FY21 shows that although there has been some expenditure compression under heads/ ministries such as agriculture and allied activities, telecommunications, power, railways, women and child development, there has also been significantly higher expenditure under the head/ministries such as food and public distribution, rural development, and direct benefit transfers for vulnerable sections of the society, health, and fertilizers.

Therefore, as against the budgeted expenditure of INR 30.42 trillion in FY21, the RE shows an expenditure of INR34.50 trillion, an increase of 13.4%. To fund this, the government has taken recourse to both local and external borrowings and plans to borrow another INR800 billion from the domestic capital markets over the next two months.

The FY22 Union Budget extends the expenditure pattern adopted in the FY21 budget, by allocating higher/more resources to public health (INR350 billion for COVID-19 vaccination), Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS), affordable housing segment, micro small, and medium enterprises, rural development, etc. However, closer scrutiny of FY22 numbers suggest that this increase is over the FY21 budget estimate (BE) and not the RE. For a number of heads/ ministries, the FY22 BE is significantly lower than the RE for FY21.

This is understandable as the need to spend in FY22 on these heads/ministries is no longer as much as it was in FY21. Another challenge the government finances face is expenditure rigidity, because of which rationalizing/reorienting expenditure sufficiently in favor of the heads that really needs it, is always difficult.