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How big is growth push from the Budget 2021?

Not much. The devil is in the details

* Union Budget 2021-22 is hailed as growth expansionary. With fiscal deficit of the central government (CG) pegged at alltime high of 9.5% of GDP in FY21 and budgeted at 6.8% of GDP for FY22 – both much higher than expectations, it is believed that the Budget will help push growth higher, especially with all-time high growth of 28.4% YoY in total spending in FY21RE. Further, the average growth of 28% YoY in capital expenditure (capex) in FY21RE and FY22BE is also expected to create better growth multiplier.

* In our recently published note, we explained that the adjusted capex growth is estimated at 6.6% in FY21RE and budgeted at 12.3% YoY in FY22BE, implying an average growth of just 9.5% in FY21 and FY22, much lower than the growth suggested in the Union Budget and similar to the growth seen in the pre-COVID years. If so, the expected growth multiplier is expected to be much lower than perceived.

* Further, while capex has a higher growth multiplier than current/revenue spending, and, thus, is more important from the long-term growth perspective, total spending is more important for economic impact in the short run. There are two important points to note:

     * A large part of fiscal stimulus is already over. Record-high spending growth in FY21RE is on account of higher food/fertilizer subsidies, which is a one-off expenditure on account of COVID-19. More importantly, majority of this spending is already incurred. In hindsight, it helps explain better-than-anticipated economic recovery in the past few months and also better performance of the rural vis-à-vis urban economy during COVID-19, and

    * Total spending growth is budgeted at record-low of just 1% YoY next year, with first-ever budgeted decline in revenue expenditure in the past half a century. A large part of this slower budgeted growth is on account of disappearance of one-off COVID-related expenditure such as subsidies and MGNREGA. In short, there was a fiscal stimulus in FY21, but definitely not in FY22.

* Lastly, the Government’s proposal to bring down fiscal deficit to below 4.5% of GDP by FY26 is also seen as growth expansionary. This is also highly misleading. Assuming average nominal GDP growth of 10% and tax buoyancy of 1.2x (same as in pre-COVID period) between FY23 and FY26, a fiscal consolidation of 0.6 percentage point (pp) of GDP per annum till FY26 means average growth of just 6.2% (5.2%) in total (primary) spending, slower than 8.6% (8.3%) seen in the pre-COVID period.

* Overall, while the Budget has not done anything to disturb the economic growth momentum (which is the best part), it is definitely not a largely perceived “growth expansionary” Budget also.

Union Budget 2021-22 is hailed as growth expansionary. With CG’s fiscal deficit pegged at all-time high of 9.5% of GDP in FY21 and budgeted at 6.8% of GDP for FY22 – both much higher than expectations (~7% and ~5.5% respectively), it is broadly believed that the Budget will help push growth higher, especially with alltime high growth of 28.4% YoY in total spending in FY21RE (Exhibits 1-2).

Further, the average growth of 28% YoY in capital expenditure (capex) in FY21RE and FY22BE is also expected to create better growth multiplier. However, as we have explained in our recently published note, the adjusted capex growth is estimated at 6.6% in FY21RE and budgeted at 12.3% YoY in FY22BE, implying an average growth of just 9.5% in FY21 and FY22, similar to the growth seen in the pre-COVID years. If so, the expected growth multiplier is expected to be much lower than perceived.