Expectations for Union Budget 2022-23: Balancing expectations and needs

Even after two years the pandemic is still not in the rear view. Coronavirus variant (Omicron) is ravening across the globe; governments are struggling to minimize supply chain disruptions and economic activity, and to support the social and health need of their country. Finding balance between life and livelihood is once again at top of the agenda.

In India, several sectors are still struggling and have not recovered to their pre-pandemic levels and signs of stress are evident across sectors, especially for small businesses. Localized lockdowns and strict restrictions are a possibility if cases continue to surge. Given that 3rd wave in India could see an exponential rise in the number of COVID-19 cases, additional spending from the government is warranted for managing the pandemic and to support growth. The Union Budget for 2022-23 would thus be framed at the backdrop of a very difficult situation as uncertainty remains high and balance sheets (governments, businesses, and households) remain stretched.

Derailing the fiscal consolidation plan: We expect the government to meet the fiscal deficit target of 6.8% and set the target for FY23 at a higher level of 6%. According to the 15th Finance Commission, the Central government should bring down fiscal deficit to 4% of GDP and states should bring it down to 3% by FY26 that would bring down the liabilities of the Centre and States to 32.5% by FY26. However, given that the pandemic has lingered much longer than anyone expected, targets will need to be revised to accommodate social and economic needs.

It is time to address white elephant in room (non-merit subsidies): It’s time to relook at non-merit subsidies and re-allocate funds to schemes with multiplier effects given that government’s debt burden and interest payments remain high. Around 45% of the revenue receipts were budgeted for interest payments in FY22 compared to pre-pandemic level of 36% (FY20 actuals).

This is likely to increase with expected increase in interest rates this year. As researchers estimate non-merit subsidies (Centre and State) add up to more than 5.5% of GDP, the government can consider reallocating a share of this finds towards other developmental schemes. Subsidies by the government can be categorized into merit which consist of food, education, health, water supply and sanitation and non-merit subsidies which includes fertilizers, energy (power), ports, roads, etc., the distinction based on externalities associated with the merit services.

Balancing social and economic needs: Given that general government debt level remains high (89.6% to GDP in FY21), and this constrains the government’s ability to respond to future shocks, the government must aim to maintain a fine balance between social expenditure and capex, as both will need equitable thrust. Increased thrust on capital expenditure is required to uplift the potential output of the economy to fulfil the dreams of ever-growing population, while social spending and immediate stimulus measures are needed to support the battered not so well-off population.

Spending on rural jobs guarantee scheme and capital expenditure should be on priority. We expect the government to increase spending on MGNREGA and PM-Kisan programs to support demand and job creation. Demand for work under the MGNREGA scheme remained elevated in the current fiscal amidst weak informal labour markets. Even after an additional allocation of Rs 100 billion in the current fiscal year, the utilization has been more than 100% of allocated amount (till date i.e. mid-January), indicating both likely payment delays and high demand for work.

Managing expectations for labour supply: We expect the government to introduce measures to facilitate the new hybrid work environment that would be the new normal across various sectors. Migration of labour is now no longer a once in a lifetime phenomenon. The COVID-19 waves had led to great uncertainty over availability of skilled labour and increased the cost of labour for businesses. Reverse migration, rur-urbanisation, could hold the key, at least for the services sector.

Spend, not just budget: Only 49% of the budgeted amount for capital expenditure has been spent by the government during the first eight months of the fiscal year. There is a large volume of appropriated but unspent expenditure by the Central government every year. CAG estimates that unspent expenditure was about 2.0% of GDP in FY20.

Sector wise Expectations from Upcoming Budget

MSME Sector

MSMEs continue to face several headwinds such as low consumption expenditure, high commodity prices, elevated freight costs and supply chain disruptions, in addition to the operational disruptions caused by new variants of the virus. Given this difficult operating environment and market condition, we expect government to provide considerable relief in the Union Budget for the MSME sector, specifically:

• Address the issue of delayed payments: Since the launch of MSME Samadhaan in Oct 2017, only 22% of the applications have been either disposed or mutually settled. While 21% of the applications have been rejected a whopping 57% of the applications are either currently under consideration or yet to be viewed by the council. It could be several months, if not years, before these applications are resolved. Measures to expedite this process is expected. To reduce delays in the future, the government should help MSMEs adopt a standard form of commercial contracts and look for ways to automate all the process from application filling to disposal. A unified trade payment database, on patterns of credit bureau could be envisaged.
• Alleviate working capital constraints: More than 90% of the invoices uploaded on the Trade Receivables Discounting System (TReDS) get financed. Growth in both the number and value of invoices being uploaded shows a healthy trend. The need of the hour is to expedite onboarding of all public sector enterprises and incentivizing all large corporates to use the TReDS platform actively.

Currently, the number of new COVID-19 cases are almost twice the level of new cases reported during the peak of the first wave in India. Data from the RBI shows signs of stress in the bank loans to MSMEs has emerged by September 2021 much before the outbreak of Omicron. A further deterioration in the situation and subsequent disruption to businesses will warrant the extension of the government backed Emergency Credit Line Guarantee Scheme. The government can also consider providing sub-ordinate debt to the MSMEs which are under the NPA stress. In 2020, the government allocated a sum of Rs 200 bn towards this as part of its fiscal stimulus measures.

• Ease of access to capital: Measures to operationalize the Fund of Funds scheme on a fast-track mode is expected. Disruptions to business resulting from strict lockdowns to control the third wave could revive the demand for restructuring of loans, including already restructured loans. MSMEs have already faced severe financial crisis during the previous two waves and thus would need special incentives, loan restructuring and moratorium.

• Strengthen export infrastructure: The existing network of Export Facilitation Centers and Enterprise Development Centers should be expanded to include more industrial clusters in the country. Difficulties associated with finding the right business partner is a major restricting factor for MSMEs not exporting to other markets. Exporters should be incentivised to use business information portal since the probability of a firm exporting to new markets increases by around 0.1% with each additional day of time spent on such portals. Further, the government needs to take measures towards creating an enabling ecosystem to export high-technology products.

• Solidify the agenda of Aatmanirbhar Bharat: Measures to bring down the cost of raw materials, which have soared in the recent past due to increasing commodity prices, will allow MSMEs to remain competitive and contribute to the agenda of Aatmanirbhar Bharat. While the government has been proactive in addressing this issue, we expect the reduction in customs duty and correction of inverted duty structure to be extended to other basic raw materials too.

Banking

• Given that stressed assets is expected to increase significantly, government should consider allowing financial institutions to claim 100% tax deduction for bad and doubtful debt provisions.

• Policy measures to address the governance, management, and operational issues faced by public-sector banks is expected. A roadmap to reduce the government’s stake in public sector banks and consolidation is also expected.

Insurance

• Benefits and need of insurance (specially health insurance) was felt by every Indian during the pandemic. Government may aim for universal health insurance albeit through direct funding by incentivizing private insurance sector. Measures such an increase in the tax deduction limits and exemption from GST on insurance premiums, to improve social protection are expected.

• The Insurance industry has suffered huge blows during the pandemic, with increasing a long gestation period, the limit of eight years for carry forward and set-off of losses may be enhanced for insurance businesses.

• To encourage adoption of annuity and pension products, government may make annuity income tax free (up to a limit) or annuity products may be made tax free on purchase. As currently on buying a pension product, policyholder pays a tax on annuity and pays income tax on receiving the annuity. Further, the insurance premiums are taxed at a GST rate of 18% which increases the cost to purchase any non-investment insurance (term life, health, general insurance). Given that the purchase of such a policy is not done for investment purpose, government may exempt it for policies with a minimal cover.

Infrastructure

• While the private sector investment revival will take time, the economy needs to be supported by government investment. Hence, the thrust on investment and infrastructure is expected to continue. Government is likely to contribute a major part to the development of healthcare infrastructure. Investments towards improving education and healthcare infrastructure is expected.

• India aims to construct 60,000 km of world-class highways across the nation by 2024, at a rate of at least 40 km per day. The budget needs to take the growth agenda forward and push the envelope on building infrastructure. Infrastructure development must encompass not only physical but also digital connectivity.

• Budget may include the development of major public roads, railways, highways, and expressways and digital infrastructure. Enhanced funding is envisaged with the idea of augmenting the transportation infrastructure and boost economic growth.