Budget 2022: Why the COVID-19 support rollback won’t leave India gasping in pain

Economic Survey 2021-22:

Budget 2022:  The onset of Covid-19 marked an exceptional time in history. While economic activity slumped, fiscal and monetary policy across the globe stepped up to save growth/livelihoods and minimise the impact of what could have been an economic catastrophe.

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Unlike the many developed markets where the support lines were opened fairly quickly, India had to wait a few months for the relief packages to come in.

Economists pointed out that, while India announced many packages, the net fiscal impact has been small. So when the world starts rolling back its fiscal support, India has a little less to worry on the fiscal front since there isn’t much to roll back. India, instead, used the opportunity well to do structural reforms, which are likely to benefit the country in coming years of growth.

One, the Emergency Credit Guarantee Scheme had an outlay of Rs 3 trillion, but it did not really involve fiscal expenditure from government’s coffers. Its fiscal liability would only arise if the beneficiaries or MSMEs were unable to pay the money back. Two, the Agriculture Infra Fund, where the beneficiaries could avail mid-to-long term loans at lower costs, had an outlay of Rs 1 trillion. Again, these are loans, so no fiscal expenditure is involved. Three, the Rs 900 billion liquidity injection into DISCOMS. It was to be raised from the markets against DISCOMS’ receivables and they were guaranteed by the state.

Clearly, all the announcements led to a relatively small fiscal burden–of 1.7% of GDP or roughly Rs 3.4 trillion.

Did all of it reflect in government expenditure?

When the GoI made the Budget for FY21 pre-Covid, total budgeted expenditure was Rs 30.4 trillion. But, the actual FY21 expenditure came in at Rs 34.5 trillion. For FY22, the Budget figure stood at Rs 34.8 trillion. This year Covid sops stand close to Rs 2 trillion, but GoI has been relatively sparing with other expenditures so the overall numbers are likely to remain within ‘bounds’. Therefore, the chance of the government meeting its expenditure estimates looks bright. In Apr-Oct FY22, GoI used 46% of its budgeted capital expenditure and 54% of its budgeted revenue expenditure.

On the expenditure side, vaccine coverage was being keenly watched. For FY22, Rs 350 billion was set aside in the government budget. Then, with the announcement of free vaccination for those above 18 years, the outlay was revised to Rs 500 billion. However, the government seems to have spent much lesser than these estimates.

In a response to a RTI, the government has said Rs 197 billion has been spent thus far for the 117.56 crore doses, for 96.5% of the population, administered at government Covid Vaccination Centres (CVCs) from May 1 to December 20.

Breakdown of revenues

With economic activity limited to essential sectors, the impact of the pandemic on revenue (especially taxes) for FY21 was significant.

In FY21, net revenues were down by Rs 6.4 trillion or 30% lower than budgeted. The big culprit was of course the tax revenue which was lower by Rs 5 trillion. The reasons were pretty obvious–with limited economic activity, reduced profits and reduced income, the tax liability of the economy slumped.

Budget 2022:  However, FY22 started on an optimistic note, as far as government revenue was considered. The April-October tax collections stand at Rs 13.6 trillion, obviously higher than the collections for the same period in FY21 at Rs 8.8 trillion but also higher than pre-Covid averages of Rs 10 trillion.

At this run rate, the government is set to meet and in fact exceed its budgeted tax collections of Rs 22.1 trillion in FY22.

Higher corporate earnings and increased tax collections in excise duties as the oil prices remained low helped the government in bulking up the tax collections. On the other hand, even non-tax revenue is painting a sunny picture, with talks of disinvestment picking pace. If even one of the big deals such as Air India comes through, revenue projections of the year will be met. Overall, chances are bright that the fiscal deficit for the year could settle lower at 6.5% versus the 6.8% that was budgeted.

Budget 2022:  budget-numbers-R

India versus world

There was a vast dichotomy between the way the developed world responded–by spending its way out of the pandemic–and the emerging economies acted, which remained relatively cautious.

Budget 2022 Most emerging economies extended little help by way of direct fiscal allocation. They chose instead to tread the path of equity, loans and guarantees, such as the Emergency Credit Line Guarantee Scheme (ECLGS) we saw in India.


On an average, advanced economies gave direct support worth 12% of GDP, and equity, loans and guarantee worth another 11% of GDP. Averages of emerging economies–at 6% of GDP in direct fiscal support and 4% in equity, loans and guarantees–don’t reflect the general trend, since they were skewed by higher spending by a few countries on direct support. That said, India spent an additional 4% of GDP (over the average) in fiscal support and there will be an additional 6.2% infused through equity, loans and guarantees.

The key question then remains–who funded these huge deficits? Traditionally, there are tax-based, expenditure-based and debt-based approaches to deficit financing. This year, given the pandemic, all the traditional approaches had a limited and difficult application.

Neither the tax could be raised nor expenditure be curtailed and, if debt was increased, who would absorb the supply anyway? This was the year when MMT (modern monetary theory) dominated the economic landscape. Modern monetary theory says that the government can simply print the money it needs to borrow, and need not issue bonds at all.

For most of the developed worlds, Budget 2022 it was the central banks who financed the deficit by printing more money via the Quantitative Easing route. For example, for the United States, not only did the fiscal balance turn deep negative, the printing even kept the money supply soaring.


As the pandemic recedes, this approach is likely to change. There is a likely chance of higher taxes for the rich to absorb the higher debt faster.

World Bank projects India’s GDP growth at 8.3% for FY22, 8.7% for FY23