Home > 2022 > Pressing Issues before Budget 2022-23 | Sarma & Sunder

Mainstream, VOL LX No 6, New Delhi, January 29, 2022

Pressing Issues before Budget 2022-23 | Sarma & Sunder

Friday 28 January 2022

by Atul Sarma, Shyam Sunder *

Budget 2022-23 has to be framed under the shadow of three sets of pressing issues. One relates to the devastating economic impact of Covid-19, the second to restoring growth and putting the economy on a higher growth trajectory and the other to a few major issues emanating from the above two needing urgent government attention.

Covid-19 exposed utter inadequacy in health infrastructure and health personnel in the country. This is not the first pandemic nor is it going to be the last. The first two decades of the twenty first century alone have witnessed five other pandemics: SARS (2002-03), H1N1 Influenza (2009), Swine influenza (2009), Middle East Respiratory Syndrome termed as MERS (2009) and ZIKA (2013). But Covid-19 is the worst, comparable to the Spanish flu that occurred a century ago in1918 and infected an estimated 500 million people and killed an estimated 20-50 million. Climatologists are of the view that with warming up of the globe, several of the dormant viruses could get activated and cause similar pandemic. This calls for putting in place adequate health infrastructure and properly trained health personnel on firm footing all across the country.

It is also important to note that at the United Nations General Assembly in September 2019, just a few months prior to the pandemic, all countries endorsed the Political Declaration on Universal Health Coverage (UHC), affirming that “health is a precondition for and an outcome and indicator of the social, economic and environmental dimensions of sustainable development and the implementation of the 2030 Agenda for Sustainable Development.” It is also noteworthy that UHC does not mean just “health care” provided by health workers in health facilities; it includes all those services that promote health and prevent disease at the population level—outbreak surveillance, safe water, and sanitation etc. just to give a few examples. Thus UHC has many benefits beyond treating diseases that include improved health security and better protection against the ravages of future pandemics and epidemics. As the IMF in one of its papers has noted that “No country has made significant progress toward UHC without relying on public monies as its main funding source.”

The pandemic ravaged the Indian economy leading to its contraction of 7.3 % in 2021 fiscal. However, it is estimated to grow at 9.2% in 2021-22. While this is encouraging, the growth of GDP at constant (2011-12) prices was only 1.25% over 2019-20 leaving aside the loss of growth during the preceding two years. Restoring growth and putting the economy at a higher growth trajectory is very challenging. For, most growth determinants declined even prior to the pre-pandemic period. For example, the investment rate declined to 32.2% in 2019-20 from 39.0% in 2011-12. So did the gross fixed capital formation to 28.9% from 34.3% in the corresponding period. Gross Savings rate also declined from 35% to 30%. What is more, household sector savings declined to 17.2% from 23.6%. Similarly, the non-food credit growth declined to mere 6%.from 14% in 2011-12. Even pandemic stimulus including corporation tax reduction provided which were mostly supply side oriented is yet to make any significant impact on growth.

Of three drivers of GDP, viz. consumption, investment and export, consumption, is a major driver of the Indian economy but private consumption is far below the pre-pandemic level. It is understandable. The informal sector contributing about 50% of GDP and 91 % of total employment suffered a heavy loss in income and employment first due to demonetization and then lockdown to contain Covid-19. The stimulus package for MSME did not recognize the overwhelming existence of micro enterprises accounting for more than 99% of the MSMEs. As a result, it failed to provide any significant relief to the micro enterprises.

According to CMIE, unemployment increased to 14.5% in the week ended May 16, 2021 and it is high in rural areas also. The Global Hunger Index that considers four indicators: undernourishment, child stunting, child wasting and child mortality, placed India at 101 in 2021 compared to 95 just a year ago.

Lockdown further brought to the fore the visibility of massive urban migrant labour and their miserable conditions. They require assured shelter and social security.

The ‘State of Working in India 2021’ report of Azim Premji University revealed that poverty increased during the first wave. It estimated that the pandemic would push 230 million people into poverty. CMIE also observed that in the week ended May 16, 2021, around 90% of households reported a loss of income compared to a year ego. What is worse, inflation that hurts the poor most is rising-RBI has projected CPI inflation at 5.7% for the January-March quarter of 2022.

At another level, income distribution exacerbated during the pandemic. Profit share rose while wage share slumped. In fact, the quarterly net profit of the BSE 200 companies reached a record high of Rs.1.67 trillion in the third quarter of FY21-up by 57% year-on-year. Lucas Chancel in World Inequality Report coordinated by Thomas Piketty noted that top 1% of India’s population earned 21.7% of the country’s national income in 2021 while the bottom 50% made just 13.1 %. Similarly, top 1% own 33% of the country’s wealth compared to 31.7% previously while the bottom 50% does 5.9%, down from 6% earlier.

To address issues such as above would require appropriate policy design at one level and massive public expenditure at another. But the fiscal deficit was already 6.8 % of GDP in 2021-22. Keeping in view the demand deficiency resulting from job loss, growing unemployment, and rising poverty, one can argue for higher fiscal deficit, But the fiscal deficit is much higher than the desirable norm of 3%. Again, high fiscal deficit may also crowd out private investment. Further, high fiscal deficit might adversely impact global rating which matters a lot for attracting foreign direct investment. Moreover, higher fiscal deficit would push debt-GDP ratio which is already nearing 90%.

In a situation such as above, the government should explore raising tax-GDP ratio which is low at 18% in comparison with most major emerging economies-Brazil, China and South Africa- with tax-GDP ratio in the range of 22-28%.

Implementation of a direct tax code could simplify the tax system, minimize litigation and broaden tax base by way of eliminating exemptions. Streamlining tax administration using new technologies and minimization of tax arrears would also be helpful. Wealth tax should be levied on the ultra-rich whose accumulation is shooting up. Again, the current GST design is faulty. The GST Council should be persuaded to replace it by a flawless GST which could boost income and export as also tax buoyancy. Similarly, targeted expenditure would help pruning and eliminating wasteful expenditure thus enhancing expenditure effectiveness.

In short, the issues needing Finance Minister’s attention are complex and too many while resource available to deal with them is scanty. Focusing on optimal resource mobilization and prudent resource allocation on issues that would promote sustainable and inclusive growth will be the way forward.

* (Atul Sarma (sarmaatul[at] is Distinguished Professor at CSD, New Delhi and Shyam Sunder ([at] is working with an Indian Corporate. Views are personal.)

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