10 minute read 27 Jan 2022
Union Budget 2022

Union Budget 2022: will it effectively lay a foundation for medium-term growth?

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

10 minute read 27 Jan 2022
Related topics Tax COVID-19

Budget 2022 should signal fiscal consolidation while supporting growth.

In brief

  • The NSO estimates India’s real GDP growth at 9.2% in FY22.
  • Recovery remains weak for trade, hotels, transport, communication and broadcasting services on the output side and private final consumption expenditure on the demand side.
  • Budget 2022 should focus on reviving consumption and investment while signalling fiscal consolidation.
  • A mid-term assessment of the NIP is called for, recasting its timelines and sectoral priorities.

The National Statistical Office (NSO) released the first advance estimates (FAE) of national accounts for FY22 on 7 January 2022. India’s real GDP growth in FY22 is estimated at 9.2%, that is 30 basis points lower than the RBI and IMF’s[1] projection at 9.5%. The NSO estimates have utilized available information up to the months ranging from September to December 2021 and therefore, the likely adverse impact of COVID’s third wave on the economy may not have been fully captured. While COVID’s third wave may peak in a few weeks’ time, its adverse economic impact may affect not only the last quarter of FY22 but also the first few months of the next fiscal year. It is possible that another 20 basis points of growth may be shaved off from FY22 growth by the time the second advance estimates become available in February 2022. The main sectors that have held back a more comprehensive recovery are trade, transport, hotels et. al. on the output side and private final consumption expenditure (PFCE) on the demand side as their annual estimated FY22 magnitudes remain below the corresponding levels in FY20.

Using this information, we may formulate a view on the prospects of FY23 growth. Available forecasts from the IMF and the OECD have indicated growth rates at 8.5% and 8.1% respectively. However, these may turn out to be on the higher side because the strong base effects characterizing FY22 may not be available. In fact, as per NSO’s advance estimates, at the end of FY22, the magnitude of GDP in real terms is estimated at INR147.5 lakh crore that is only marginally higher than INR145.7 lakh crore in FY20. In other words, due to the three waves of COVID that India has experienced, nearly two years of real growth in economic activities have been wiped out. The economy has to now start on a clean slate in FY23. Growth in this year would depend on the basic determinants such as the saving and investment rates in the economy. As per the FAE, the gross fixed capital formation (GFCF) relative to GDP at current prices stands at 29.6% in FY22. Capacity utilization in India continues to have considerable slack. Available quarterly data indicate a capacity utilization ratio of only 60.0% at the end of 1QFY22 and an average of 61.7% in the preceding four quarters[2]. As such, a recovery in private investment may take some time.

At present, PFCE continues to show a low growth. As per the FAE, this growth has been estimated at 6.9% in FY22. Any pick-up in demand would continue to be constrained by low-income growth in sectors characterized by a high marginal propensity to consume (MPC) such as the trade, transport, hotels et. al. sector and the MSME sector more broadly. Growth in FY23 may also continue to be constrained by supply-side bottlenecks and high prices of global crude and primary products. As such, it may not be prudent to expect a real GDP growth which is tangibly higher than 7%.

Inflationary pressures

In December 2021, CPI inflation increased to a five-month high of 5.6% from 4.9% in November 2021. Core CPI inflation also remained elevated at 6.1%. WPI inflation had surged to an all-time high (2011-12 series) of 14.2% in November 2021. In December 2021, it remained elevated at 13.6%. These inflationary pressures have largely emanated from high prices of global crude and primary commodities. There have also been supply-side bottlenecks putting pressure on prices. In the first step, these global pressures affect India’s WPI inflation rate which is slowly transmitted into the CPI inflation rate.  There is one positive spinoff of these inflation pressures emanating from the fact that the implicit price deflator (IPD)-based inflation is mainly a weighted combination of the WPI and CPI inflation rates. In recent quarters, the weight of WPI inflation has been in the range of 75-80% in determining the IPD-based inflation. Accordingly, as per NSO’s FAE, the IPD-based inflation rate is estimated to be as high as 7.7% in FY22. This is the main reason for the excess of the nominal GDP growth at 17.6% over the real GDP growth of 9.2% by a margin of 8.4% points. This has resulted in a significantly improved growth in center’s gross tax revenues (GTR) in FY22.

FY22: likely budget outcomes

High nominal growth combined with base effects resulted in center’s GTR growth of 50.3% during the first eight months of FY22. In the first six months of FY22, this growth was even higher at 64.2%. In October and November 2021, the average growth in center’s GTR has fallen to about 17.4% as the base effect is now weakening. This trend is likely to continue in the remaining part of the fiscal year. Taking this into account, we assess that the annual growth in center’s GTR may be close to 35% implying a buoyancy of nearly 2. With these buoyant tax revenues, government may be able to limit the FY22 fiscal deficit to its budgeted level of 6.8% of GDP although a marginal slippage may not be ruled out. There may be some shortfall in disinvestment targets. Also, two supplementary expenditure demands have already been announced which require to be accommodated.

The budgeted disinvestment target for FY22 is quite ambitious at INR1.75 lakh crore. As per available information, disinvestment receipts as of 21 January 2022 stood at INR9,329.9 crores, that is 5.3% of the FY22 BE. Disinvestment initiatives require to be accelerated in the remaining two months of the fiscal year if the shortfall from the target is to be kept at a minimum.

FY23 union budget

a.  The revenue side

In FY23, we expect the real GDP growth rates to moderate to 7%. With the IPD-based inflation also expected to come down in the range of 6-6.5%, we may expect a nominal GDP growth of about 14%. Since the base effects in center’s GTR would have weakened, we may expect a lower annual GTR growth of about 16% in FY23 which, in combination with a nominal GDP growth of 14%, implies a buoyancy of little less than 1.2. This would still compare well with center’s GTR growth performance in the pre-COVID years which averaged only 5.6% during FY18 to FY20. The major CIT reform undertaken in FY20 had provided among other things, a concessional CIT rate of 15% for fresh investment in manufacturing by domestic companies provided their production took off on or before 31 March 2023[3]. Since nearly two years have been lost due to COVID, government may consider extending the time limit for availing this benefit. The GST compensation provision would also come to an end in June 2022. This would cause a major revenue shock at least for some states. This matter may be considered by the GST Council, if the compensation arrangement is extended for say, about two years. Although it may not have a direct impact on center’s net tax revenues, any continuation of the compensation cess arrangement may delay a more comprehensive reform of GST. With respect to non-tax receipts, the scope of National Monetization Pipeline (NMP) may be extended to cover monetization of government-owned land assets.

b.  Expenditure priorities

Expenditure prioritization in FY23 should focus on reviving both consumption and investment demand. The National Infrastructure Pipeline (NIP) should be reassessed, and its path may be recast in order to make up for existing deficiencies in relation to the original targets particularly in the health sector. In this regard, the infrastructure investment undertaken by the state governments and the public sector should be realistically ascertained and shortfalls with respect to original targets may be identified. According to available information for 27 states which had budgeted for an aggregate capital expenditure of nearly 2.7% of GDP in the current fiscal year, only 38.5% of their combined budget target has been achieved by October/November 2021, amounting to about 1.1% of GDP. Since consumption demand also remains weak, some fiscal support in the form of an urban counterpart to MGNREGA may be considered in addition to directly supporting some of the contact sectors such as tourism, aviation, hospitality etc. which are suffering due to COVID. Revival of the economy in FY23 would critically depend on containing the adverse economic impact of COVID’s third and subsequent waves to a minimum.

c.  Fiscal balance

FY23 would be appropriate to consider a calibrated return to fiscal consolidation while using fiscal policy to support growth. The Fifteenth Finance Commission (FC 15) had suggested a fiscal consolidation path where the FY23 fiscal deficit for the center was benchmarked at 5.5% of GDP. In their pessimistic scenario, it was kept at 6% of GDP. It may be best to limit the reduction in fiscal deficit to about 1% point of GDP to say, 6% in FY23. From here on, a stepwise reduction of 0.5% points per year would enable reaching a level of about 4.0% of GDP by FY26. By this time, as suggested by the FC 15, a high-powered intergovernmental group should be constituted to re-examine the sustainability parameters of debt and fiscal deficit of the central and state governments in the light of new empirical realities particularly taking into account, the falling interest rate on government debt. 

Medium-term growth: India to emerge as the global growth leader

FY23 would be the first normal post-COVID year. This would be the first year of a medium-term recovery in which India is slated to lead global growth. The growth forecasts of major multilateral institutions for the Indian economy are summarized in Table 1. As per these forecasts, India’s FY22 growth ranges from 8.3% to 9.5%. In our assessment, it may be feasible to clock in a growth of nearly 9% in the current fiscal year. The FY23 growth estimates have a relatively wider range from 6.5% to 8.7%. In any case, India may be able to sustain a medium-term growth in the range of 7-7.5%.

India’s real GDP growth prospects: forecasts by multilateral agencies


The FY23 Union budget would be the first normal budget after the COVID shock year of FY21 and the base effect year of FY22. A buoyant growth in central taxes in FY23 is likely to be enabled by high real and nominal GDP growth projected at 8% and 16% respectively. This will also facilitate a return to fiscal consolidation while ensuring sufficient capital expenditure to make up for the deficiency in infrastructure spending in the first three years of the NIP. This, coupled with increasing pace and coverage of vaccination, will further strengthen India's ongoing growth momentum.

About this article

By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

Related topics Tax COVID-19