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2:00 (IST) February 1, 2022
Live Budget 2022 Updates: “High GST Revenues Offer Evidence of K-Shaped Recovery”
With modest revenue growth of 6.0% and Rs. projected a widening of its absolute fiscal deficit to Rs. 16.6 trillion in FY2023 BE from Rs. 15.9 trillion in FY2022 RE. Within fiscal constraints, the Modi government opted to undertake a modest fiscal consolidation of 0.5% of GDP, albeit at a higher than expected level of 6.4% of GDP for FY2023, while allocating a considerable amount of rupees. 7,500 billion for growth support investments.
An early implementation of the exciting 24.5% capital expenditure expansion at a substantial Rs. 7.5 trillion can trigger sustained economic growth momentum, with the potential to increase job creation, support domestic consumption and accelerate private sector capacity expansion. The impact of increased government capital spending will be complemented by the Rs 1 trillion interest-free bonds to the states, which will help them prioritize capital spending even as they tackle the challenges end of GST compensation.
The higher than expected budget deficit and gross borrowing at almost rupees. 15.0 trillion, with no update on measures to facilitate expected bond index inclusion, pushed the 10-year G-sec yield past 6.88% intraday, negating the benign impact of change/conversion announced yesterday. Large dated borrowing coupled with impending repo rate hikes may push the 10-year yield to 7.0% over the next quarter, setting the stage for an upward shift across the yield curve.
The Union budget set the fiscal decentralization to the states at 8.2 trillion rupees for the financial year 2023 BE, which is 9.6% more than the 7.4 trillion rupees transferred for the financial year 2022 RE. Increasing central fiscal decentralization will help states mitigate risks arising from the likely discontinuation of GST compensation after June 2022, while increasing infrastructure spending. While we expect GST compensation of Rs. 1.2-1.5 trillion (including pending dues for FY 2021-FY 2022 plus regular flows for Feb-June 2022) at pay to states in FY2023, this would be half the magnitude of GST compensation (Rs 2.5-2.8 trillion) that states received in FY2021-FY2022. In addition, the normal net borrowing limit for state governments has been set at 3.5% of GSDP for FY2023, along with another 0.5% of GSDP earmarked for power sector reforms. , in accordance with the recommendations of the 15th Finance Committee for the next tax.
The buoyancy of GST revenue despite the pandemic is a testament to the government’s anti-evasion efforts as well as the K-shaped recovery, with large formal players gaining at the expense of others. – Aditi Nayar, Chief Economist, ICRA Limited