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Mainstream, VOL LX No 7, New Delhi, February 5, 2022

Union Budget 2022-23 - A Comment | Sarma & Sunder

Friday 4 February 2022


by Atul Sarma and Shyam Sunder

“In the long run we are all dead. Economists set themselves too easy if in tempestuous seasons they can only tell that when the storm is long past the ocean is flat again.” J.M Keynes

Union Budget 2022-23 was presented against a number of challenges: economic and social ravages of Covid-19, global uncertainty, growth recovery, supply chain disruption, massive job loss due to lockdown and rising prices and unemployment, to cite only a few. Yet the focus of the budget is clear: revive growth with supply side push by way of a booster shot through capital expenditure, promote digital and fintech, tech-enabled development, energy transition and climate actions, facilitate start-ups and hike public investment to crowd in sinking private investment.

One noteworthy feature of the last two budgets is that unlike earlier, it has been cast in a transparent manner avoiding any creative accounting. The other important points are: despite all the challenges, the budget continues with fiscal consolidation bringing down revenue deficit from 4.7% in 2021-22 (RE) to 3.8 % in 2022-23 and fiscal deficit to 6.4% from 6.9% while keeping tax rates more or less stable apart from a new income tax of 30% on returns from digital currencies and tax cut on VCs and start-ups. Coming to financing the fiscal deficit, market borrowing via G-sec and T-bills is expected to finance around 70% of the fiscal deficit in FY23 with a growth of 32.3% compared to FY22RE. The danger is high market borrowing might crowd out private investment.

The budget sets 9.2% growth target. Effective capital expenditure has been given a major push even from a high of Rs. 6 lakh crore in 2021-22 (RE) to Rs 7.5 lakh crore inclusive of Rs 3.17 lakh crore as grants-in-ad to states for capital asset creation. Such massive capital expenditure, largely on creating various types of infrastructures is expected to create employment as an answer to massive job loss and rising unemployment. This, in turn is expected to generate consumption multiplier thus giving a boost to deficient private consumption thus to growth. But the devil lies in execution which is notoriously sluggish involving time slippage. To that extent, the expected outcome might have a time lag.

The implication of the delay in income and employment generation should be viewed in the following context. 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. Yet, the budget has reduced food subsidy to Rs 206,831.09 crore from Rs. 286,469.11 crore in 2021-22 (RE). What is worse, the allocation Mahatma Gandhi National Rural Employment Guarantee programme which gives some wherewithal to the rural jobless and the poor was curtailed by more than 25% over 2021-22 (RE). In fact, what was expected in the present condition was the extension of a similar programme covering the urban unemployed and the poor.

However, the budget has sought to transfer Rs. 2.37 lakh crore for procurement of wheat and rice under MSP. Two points are worth noting here. First, the small and marginal holdings (up to 2.00 hectares) accounted for 86.21 % of all farmers in 2015-16. These farmers with little marketable surplus are not likely to benefit much from such transfer. More so, because procurement agencies have no presence beyond a few states. At another level, the budget has curtailed fertilizer subsidy by about 25% over 2021-22 (RE).

The larger issue, however, is that with 58% of India’s population being dependent primarily on agriculture and allied sectors, this sector calls for a strategy beyond subsidy. It needs much larger investment on activities such as R&D, building infrastructure to create efficient value chain. But the fact is, the budget provided nothing for research and education in agriculture. Similarly, the budget has allocated about 11% less over 2021-22(RE) for rural development.

Covid-19 exposed utter inadequacy in health infrastructure and health personnel in the country. 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 budget has not significantly augmented –remained almost stagnant at Budget 2021-22 RE level.

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. The budget has also not offered anything substantive to micro enterprises.

As for resource mobilization, the thrust has been on sources other than tax despite India’s tax-GDP of 18% being low in comparison with most major emerging economies-Brazil, China and South Africa- in the range of 22-28%. Non-tax revenue sharply declined by 15 % in the budget over 2021-22 (RE). Higher reliance is being placed on sources like disinvestment and asset monetization. Even for this, the actual realization fell far short of target: against the target of 1.75 lakh crore in 2021-22 (RE), only measly Rs.0.78 lakh crore could be realized. The budget has down sized disinvestment receipts to Rs.0.655 lakh crore.

In sum, the budget aims to promote state capital induced private investment relying on supply push through capital expenditure. While growth can be expected, how soon it would happen depends on the pace of execution of capital projects, the past record of which is not very promising. Income and employment multiplier effect would also be felt accordingly. However, inclusive development which is one of the four pillars of economic recovery is inadequately provided in the context asymmetrical growth process hugely tilting in favour of the richest while the poor being on the fringe. The budget further contains futuristic positive initiatives e.g., those relating to green actions and digital economy.

(Authors: Atul Sarma (sarmaatul[at] is Former Head and Professor of Economics, Indian Statistical Institute, Delhi Centre and Shyam Sunder ([at] is working with an Indian Corporate. Views are personal.)

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