Context

The Union Budget 2022-23 received a great deal of attention even before the financial year began due to the Russia-Ukraine conflict, and the consequent rise in inflation. There has been considerable speculation on whether the fiscal targets will be altered due to the evolving conditions.

Estimate of GDP

•  The critical estimate of GDP growth assumed for this year has certainly changed, with the RBI also adjusting its earlier forecast.
• However, the budget was conservative to begin with, assuming an 11.1 per cent growth estimate on which its revenue collection targets were based.
• Given that real GDP growth has been scaled down by the RBI to 7.2 per cent, and as inflation has gone up, on balance, the 11.1 per cent assumption looks tenable.
• Hence, inflation has been a positive for the government in this respect.

Tax collection

• Another positive that emerged last year was that overall tax collections were even more buoyant than expected.
• From the budgeted figure of Rs 22.17 lakh crore, the revised estimates raised the target to Rs 25.16 lakh crore.
• In comparison, actual collections have turned out to be even higher at Rs 27.07 lakh crore.
• If this buoyancy is maintained, then the government can expect the 2022-23 target of Rs 27.57 lakh crore to be exceeded by around Rs 2.5 lakh crore (of this, around 30 per cent will go to the states).
• This additional revenue would ideally flow from enhanced GST collections, corporate tax, and customs.
• Central to GST collections increasing is private consumption.
• Today, high inflation erodes the purchasing power of households, which will divert a larger portion of their incomes for necessities that have become expensive.
• Therefore, there will be uncertainty here. 
• Corporates did well last year as they did manage to pass on higher input costs to the consumers, especially in the second half of the year.
• Can they do it for the second time is the question.
• High growth in trade volumes led to the government raking in higher customs collections. W
• ith global growth set to slow down in 2022, a similar flow is unlikely.

Excise collection and challenges

• The government will be watchful of excise collections as it is possible that rising fuel prices will lead to lower consumption.
• Also, in case crude oil continues on the current path and remains in the region of $100-120/barrel, a call may have to be taken by the government on the excise duty: Once the prices of diesel and petrol remain at a new threshold, there will be a tendency for freight rates to be increased permanently.
• This will have a secondary impact on inflation. 

Disinvestment challenges

• On the revenue side, the LIC disinvestment that was to happen last year will materialise this year.
• The disinvestment has been pushed through for May, but would be of a much lower amount (around Rs 21,000 crore) than envisaged earlier.
• It will be interesting to see if this would be a part of the Rs 65,000 crore target for this year.

Uncertainty on the expenditure side

• The biggest concern will be the fertiliser subsidy, which has been a volatile expenditure item.
• Higher prices of natural gas have meant that fertilisers have been more expensive and so, the budgeted amount of Rs 1.05 lakh crore will have to be revisited.
• With inflation already high and agriculture expected to be the bright spot again, the government cannot risk ignoring the subsidy element on fertilisers because there can be an impact on farm product prices.
• The food subsidy will also need to be examined.
• The present rise in food prices globally has meant that there is a good global market, especially for wheat.
• Exports for wheat and maize might rise but can distort the procurement process.

Interest rate and its implications for borrowing

• The budget had assumed that interest rates would be stable.
• However, conditions have changed quite quickly with bond yields moving up by almost 50 bps for the 10-year G-secs.
• This will mean that the entire Rs 15.95 lakh crore of gross borrowing will have to be carried out at a higher cost.
• This can result in an additional Rs 8,000 crore of interest if the 50 basis points increase holds through the year. There could be an upward bias if rates go up further.

Conclusion

The longer the conflict continues the greater will be the impact. While the government has adeptly managed the fiscal numbers in the last couple of years, this year will be particularly challenging considering the nature of the shock.

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