March , 2022
13:07 pm

Dr. Rajiv Khosla

Budget 2022 was being fretfully awaited by the people of India, as in the last two years, the Indian government had tried to resurrect the Covid shattered economy by putting its economic strength behind the corporates. The poor, common public, middle class and MSMEs were enormously hopeful that the elections in five states, increase in inflation, growing unemployment and amplified economic disparities reported by international agencies will compel the Indian government to announce pro-people policies. From income tax relief to exemption of provident fund investments, from taxation and increase in standard deduction to major announcements for the MSMEs - were all being widely anticipated. However, contrary to the expectations, the finance minister laid more emphasis primarily on the PM Gati Shakti programme (a long term and largely a supply side measure) and failed to address the problem of lack of demand in the economy. The absence of demand won’t let the supply side measures usher productive outcomes as has been experienced in the past as well. It can be said that this Budget hinges upon two pillars - high level of borrowings and thrust on capital expenditure.


The Economic Survey that was released a day before the announcement of Budget categorically stated that the economic activities have recovered and the Indian economy is expected to witness a real GDP growth of 9.2% in 2021-22. Besides, it also forecasted that for the year 2022-23, real GDP growth will hover around 8 - 8.5%. The FM too, during her budget speech, applauded the efforts of her government and remarked that the considerable increase in GST (`1,40,986 crore in January 2022) is an indication that the Indian economy has recovered from the pandemic. If we go by these remarks and datasets, naturally the question arises then why is the government going for such a high level of borrowings in the upcoming financial year when recovery is nearly complete? It is pertinent to mention here that the FM declared that the government will borrow `16,61,196 crore in next fiscal of which `11,58,719 crore will be raised from the market. This amount is even `70,000 crore more than the revised estimates (15,91,089) of borrowings in the year 2021-22.

Three factors namely disinvestment proceeds, GST buoyancy and rate of interest goes a long way in unravelling this paradox. As far as disinvestment is concerned, the government has budgeted `65,000 crores which means that the government is going to disinvest/sell a lesser number of public sector units in 2022-23. Appositely, the government had kept a disinvestment target of `1,75,000 crore in 2021-22. Thus, the exchequer is likely to remain unfilled on account of lesser disinvestment targets. Secondly, the buoyancy of GST may recede as inflation may get curbed in 2022-23 - once RBI starts increasing the rate of interest. Further, increase in rate of interest means more burden on the government in terms of repayment of the borrowed amount. In order to offset the reduction in receipts, the government seems prepared for a high level of borrowings, although the government claims that additional high capital expenditure is the reason for the increase.

There is another less talked aspect which led to a high level of borrowing by the government. RBI Governor Shaktikanta Das in October 2021 announced that India is in an advanced stage of getting included in the Global Bond Index. India’s inclusion in the Global Bond Indices could have given the safest investing option to foreign investors in Indian government’s sovereign funds, thereby driving India’s balance of payment position stronger, besides rendering strength to the Indian Rupee. The government had also permitted foreign portfolio investment in Indian government securities in the Budget 2021 so as to raise the share of foreign ownership in government securities from existing 2% to almost 9% in the next 10 years. It was anticipated that nearly $40 billion (`2.8 lakh crore) would have got infused in the Indian debt market with India’s inclusion in the Global Bond Indices market. It could have also worked in the direction of keeping bond yields low (availability of loans to the government at cheap rates) and thus, a lower rate of interest could have existed in the Indian economy for some more time. However, the silence of the finance minister on India’s inclusion in Global Bond Indices and higher market borrowing in the year 2022-23, immediately started pushing the bond yields. The yield on 10-year benchmark of 6.54% on 2032 paper surged to 6.81%.  This complete predicament has put the RBI Governor’s role in jeopardy. 

Wherein RBI Governor is expected to provide low-priced debt to the government, keep rate of interest low so that loans at economical rates for businessmen and traders get warranted; simultaneously, he will get pressurised to control rising inflation by adjusting the interest rates. RBI Governor while explaining the rationale why repo rate and reverse repo rate have not been changed in the recent period concluded the Monetary Policy Committee meeting diplomatically maintained that recovery in domestic economic activity is yet to be broad-based, and private consumption and contact-intensive services are below the pre-pandemic levels.


FM announced that for speedy and sustained economic revival, the government has massively increased the allocation on capital expenditure (capex). In numbers, the allocation for capital expenditure has been increased by 35% i.e. from `5.5 lakh crore in 2021-22 (Budget Estimates) to `7.5 lakh crore in 2022-23. However, in actuality, the `2 lakh crore increase in capital expenditure is orchestrated on Budget estimates and not on the Revised estimates (`6 lakh crore) of 2021-22 on the basis of which increase in capex comes down to `1.5 lakh crore or 25%. Of this `1.5 lakh crore too, the government has announced to give `1 lakh crore interest free loans to the states for undertaking their capex which the states have to repay.

Further, it is apprehended that if the states will make use of this interest free loan facility, then their financial autonomy to avail loans in future will also get jeopardised. Article 293 of The Constitution of India specifies that, “A State may not without the consent of the Government of India raise any loan if there is still outstanding any part of a loan which has been made to the State by the Government of India or by its predecessor Government, or in respect of which a guarantee has been given by the Government of India or by its predecessor Government.” Use of this central government backed discretionary loan facility besides landing the states in an economically disadvantageous position, may also prove to be a political stain on cooperative federalism.

Thiaga Rajan, Finance Minister of Tamil Nadu, laid out that a large chunk of expenditure on centrally sponsored schemes will now be transferred to the states as the central government may extend the justification that it has already provided interest free loans to the states. Carrying on with these schemes will either call for additional borrowings by the states or their closure due to funds starvation, the political onus of which will again be shifted on to the states. Hence, state governments, directly or indirectly will be dependent on the centre’s mercy and may find themselves strapped in a vicious cycle of borrowings. Eventually, it will lead to low pro-public measures by the state governments in future. To conclude, Budget 2022 will be remembered in history as a milestone that not only failed to deliver the much-needed goods and services to the people by the central government but also acted as a threat to cooperative federalism.

— The author is Associate Professor in DAV Institute of Management, Chandigarh

The opinion/s expressed in the article are that of the author’s and do not
necessarily represent or reflect the policy or position of this magazine.

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