India is increasing the 2022 budget spending more on infrastructure while past governments used budget declaring big-ticket economic reforms.
Two senior government officials expressed that no major budget changes were likely on individual and corporate taxes, in view of rising government debt and subdued private investments. The Center is boosting the 2022 budget towards infrastructure to build up tattered ruins, where economists state that major steps look unlikely next week, because of political strains and Prime Minister Narendra Modi was recently forced to climb down efforts to isolate agriculture after a year-long protest by farmers.
The February 2022 budget comes days before the start of elections in five states, including the densest, Uttar Pradesh, which could prompt Finance Minister Nirmala Sitharaman to push for higher rural spending and subsidies on food and fertilizer.
Sources reveal that no major budget changes were likely on individual and corporate taxes, in view of rising government debt and subdued private investments. Budget 2022 is aimed at a direction where India intends to increase spending on infrastructure in its annual budget next week to set the economy on a firmer footing, but fiscal constraints leave little chance of concessions for households hurting from the pandemic, officials reveal.
Asia’s third-largest economy is calculated to expand 9.2% in the fiscal year that ends in March, following a contraction of 7.3% in the previous fiscal year. Yet private consumption, which makes up nearly 55% of GDP, is below pre-pandemic levels amid rising levels of household debt, while retail prices have swelled nearly a tenth since the coronavirus outbreak began in early 2020.
One official seeking anonymity told Reuters, “We will focus on reviving the economy through higher investments, while individual and corporate taxes will be kept steady,” adding that reviving growth would be a priority.
To attract investments that create jobs and spur growth, Sitharaman could also boost incentives tied to production in more industries. “Continuing on its capex push, we expect another 25% increase in capital expenditure by the central government … we expect budgetary allocations for roads, highways, and railways to rise,” Nomura analyst Sonal Varma said. Food processing and exports are two areas that could see more production-linked incentives, Varma added.
After the government slashed corporate taxes in 2019 to a level among the lowest in Asian nations, further tax breaks for the industry are unlikely, the officials said. “We have one of the lowest taxes for corporates,” one added. “More tax cuts are not possible right now.”
Presently, businessmen and economists worry about growing risks of inflationary pressure, amid rising global crude prices and the next wave of COVID-19 infections that experts say may threaten over the next eight to 10 weeks.
The economy also faces the risk of a rise in interest rates, even before a pick-up in spending by consumers and companies, as the U.S. central bank plans rate hikes. While the Indian government steps up spending, it will make sure to stick to its longer-term goal of fiscal consolidation, the officials said.
The budget is likely to cut the federal fiscal deficit to 6.3% to 6.4% in 2022/23 from 6.8% in 2021/22, government officials and economists said. That could bring gross market borrowings of about 13 trillion rupees ($174 billion) against an estimated 12.1 trillion this year, analysts estimate. Past governments have used the budget to announce big-ticket economic reforms, but economists said major steps look unlikely next week, because of political pressures.
India wants to raise 1.75 trillion rupees ($23 billion) from stake sales in state-run firms, but could not complete the promised sale of refiner Bharat Petroleum Corp. Ltd, two banks, and insurance companies, among others planned last year.
The government has raised less than 100 billion rupees from divestment but is likely to list insurance behemoth LIC before the end of the fiscal year, which could bring in as much as $12 billion. “The strategy adopted in the last budget to reduce the ratio of public debt to GDP … should continue,” said economist N.R. Bhanumurthy of the B.R. Ambedkar School of Economics in the southern city of Bengaluru. This would follow the earlier route of focusing on capital expenditure and privatization of firms, he added.
On the whole, the mood of the economy in India is subdued with more focus spent on building on a ravaged economy from COVID-19 among other complications, unable to offer massive economic reforms, unlike past governments.
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