The biggest sufferer of the covid pandemic and its fallouts has been the informal sector that employs about 80% of India's labour force and produces 50% of its GDP. Sectors such as trade, hotels and transportation account for around 12% of India's GDP and employ 64% of the informal workforce. Much ground remains to be covered in offering financial protection to these stressed sectors.
Given the soon approaching elections in UP, Punjab, Uttarakhand, Goa and Manipur, it is believed the budget will tip towards rural economy which is already in a frail condition. Job creation will be another major focus area in the budget. A sustained effort towards availability of microcredit for informal employers and lowering its cost, will be the right way to go.
Not an easy task, it definitely is going to be a tightrope for the government to meet the expectations of different stakeholders. The predicted skew towards framing the budget with an eye on the election, we might be seeing higher allocation of resources to agriculture and water and power in rural segments.
As per economists to boost economic recovery, higher allocations should be towards capital spending and tax sops to increase private investment. According to Nomura's Sonal Varma and Aurodeep Nandi statement as there is still no indication of a sustained capex up cycle, the current growth phase is unlikely to be durable. Most economists have suggested higher public capital spending by the Centre in view of the restrained private investment in the present scenario.
There are also speculations on additional taxes being introduced to augment tax revenues. However, the State Bank of India (SBI) pre-Budget note has cautioned the government against imposing new taxes like wealth tax at this point as it could do more harm than benefit. State Bank of India economists have urged the Centre to not focus much on fiscal consolidation in the upcoming Budget 2022-23 as there is a need for more stabilisation measures to sustain economic recovery.
WHAT THE ECONOMISTS SAY
Most financial observers are of the view that current economic recovery seen has not been broad-based and the private investments have been subdued barring a few sectors. As per SBI chief economist Soumya Kanti Ghosh, the Union Budget should not correct fiscal deficit by over 30-40 basis points as most sectors still need support.
The economists also suggest goods and services tax (GST) reduction for a limited period and subsidised credit to small and medium enterprises (SMEs). CRISIL Chief Economist DK Joshi in a media interview had stated, “The forthcoming budget will need to continue pressing the pedal hard on infrastructure-focused capital expenditure as the private corporate investment cycle is yet to turn decisively.”
ICRA Chief Economist Aditi Nayar has proposed capital spending and frontloading transfers to states to counteract the adverse impact of the third wave on contact intensive services. Radhika Rao, Senior Economist at DBS Bank had expressed, "The quantum of support for pandemic-specific programs might be rolled back to make room for higher capex spends and consolidate the book." Similar sentiments were shared by Morgan Stanley economists expecting policymakers to favour a gradual consolidation premised on continued tax buoyancy and reduction in pandemic-related revenue spending.
INFERENCES & PREDICTIONS
According to Motilal Oswal Financial Services, the agriculture sector's terms of trade are at their weakest and need an impetus. MSMEs that were adversely hit by demonetisation of 2016 and the following GST roll-out have been further devastated by the pandemic and are looking towards the government for the breather.
The upcoming budget will need to target creating a robust capital market for foreign fund flow and on disinvestments to lower fiscal deficit. The 2022 Budget's focus will be very much on the rural economy, revival of private investment and job creation. And between all the considerations, elections could have an upper hand, making it a populist budget.
While meeting fiscal target and the countering the Omicron impact on the economy, elections are bound to play an important role in framing the budget. The cue for the same can be found in the statement by economist and former chief statistician of India Pronab Sen, “I guess there would be a lot of promises in this budget.”
