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2022–2023 budget seeks to support growth, while reining in the deficit marginally

On 1 February, the government unveiled its Union Budget for fiscal year 2022, which runs from April 2022 to March 2023. Public spending is set to increase 4.6% compared to FY 2021, while revenues are seen growing 9.7% year-on-year. The net result is estimated to be a still-large budget deficit, though it should narrow slightly from FY 2021’s estimated 6.9% of GDP shortfall, to 6.4% of GDP in FY 2022. Most notably, the government aims to ramp up its capital expenditure (capex) to support the supply side of the economy, though the budget is expected to have a minimal impact on economic growth.

Spending for FY 2022 is forecast at INR 39.4 trillion or 17.4.% of FY 2021 GDP (FY 2021 revised figure: INR 37.7 trillion), with revenue at INR 39.4 trillion (FY 2021 revised figure: INR 36.0 trillion). Looking at individual spending areas, infrastructure expenditure should see a large boost relative to FY 2021 as capex’s share of total spending is seen rising to 19.0% from 16.0%. This includes plans for roughly 25,000 kilometers of national highways, 400 new trains and roughly 0.2% of GDP to be outlaid for affordable housing.

Overall, next year’s budget should provide some impetus to economic growth as India’s economy continues to grapple with stop-start Covid-19 restrictions, which are taking a toll on private consumption levels. Moreover, with a strong focus on developing infrastructure and supporting the agricultural sector, spending should continue to boost growth over the medium term. That being said, given the medium-term fiscal deficit projection of 4.5% of GDP by FY 2025, the government took a relatively cautious approach to spending in order to balance the books somewhat.

Commenting on the Union Budget’s projected impact on economic growth, analysts at Nomura noted:

“The budget is unambiguously focused on reviving growth, via higher public capex. Capital expenditure generally results in a higher growth multiplier, so the continued focus on infrastructure spending, including support to states to spend on capex, is important at a time when private capex is sluggish. For FY22, we estimate that the fiscal impulse from the budget will be around 0.77 percentage points, marginally up from 0.68 percentage points in FY21.”

FocusEconomics Consensus Forecast panelists see the fiscal deficit reaching 6.2% in FY 2022, before narrowing to 5.5% in FY 2023.