English Article

A Budget that signals growth with stability

The Economic Survey that was placed in Parliament before the presentation of the Budget for 2023-­24 has laid emphasis on the point that India has staged a remarkable broad­based recovery to reach the level of income that existed before the outbreak of the novel coronavirus pandemic. There have been a series of shocks that began with the pandemic, followed by the war between Russia and Ukraine and the accompanying sanctions that have been imposed by the West on Russia, the slowdown and the recession in major parts of the world and the rise in inflation leading to sharp increases in interest rates, followed by capital outflow and the pressure on the exchange rate.

 

Growth and the fiscal deficit shadow

Even though the economy has staged a recovery and surpassed the pre­pandemic income level, it is still 7% below the pre­pandemic GDP trend; growth has to be fuelled by increasing public investment. At the same time, with inflation still beyond the upper tolerance limit and aggregate fiscal deficit (Centre and States) still in the range of 9% to 10% of GDP, ensuring macroeconomic stability requires continued fiscal consolidation. Thus the government is faced with the dilemma of accelerating growth by increasing public investment while containing the fiscal deficit. With interest payments accounting for 40% of the net revenues of the Centre, there is hardly any room for complacency.

Interestingly, keeping the fiscal deficit limited to 6.4% of GDP in the current fiscal has come about despite a sharp increase in food and fertilizer subsidies, by ?2 lakh crore. While the higher than budgeted buoyancy in net tax revenues by almost ?1.6 lakh crore has helped, a significant part of the adjustment is due to an increase in the denominator, the nominal value of GDP as compared to the assumption made in Budget 2022­-23.

The Budget estimate had assumed the nominal GDP for 2022­-23 at ?258 lakh crore whereas the first advance estimate of GDP released a few days ago estimated it at ?273 lakh crore. In other words, despite the revenue deficit increasing in absolute terms, from ?9.9 lakh crore in the Budget estimate to ?11.1 lakh crore in the revised estimate, as a percentage of GDP, it was from 3.8% of GDP to 4.1%. In the case of fiscal deficit, the increase was by ?1 lakh crore — from ?16.6 lakh crore to ?17.6 lakh crore, but it was contained at 6.4% of GDP mainly due to the increase in the nominal value of GDP and also the increase in tax collections.

 

A balancing act

Considering the challenges of increasing infrastructure spending while continuing with fiscal consolidation, it has been a fine balancing act on the part of the Finance Minister. She has continued the trend of making a greater allocation to infrastructure spending, and the capital expenditure is budgeted to increase from 2.7% of GDP to 3.3%. In absolute terms, the increase is from ?7.3 lakh crore to ?10 lakh crore, which is almost 37%, and considering that capital expenditure has a significant ‘crowding in’ effect, it should help to increase private capital expenditures as well. This comes after the 25% increase in capital expenditures in the last Budget.

The Reserve Bank of India has estimated the multiplier effect of capital expenditure at 1.2 — and that should help revive the sagging investment climate. Commercial lending by banks is already on the rise and with deleveraged balance sheets, the increased capital spending should help revive the investment climate further and arrest the declining trend in the overall investment­GDP ratio in the country. Further, the continuation of the interest­free loan to States to augment their capital expenditures should help in increasing States’ capital expenditures as well. Perhaps, the 6.5% growth rate for 2023-­24 estimated in the Economic Survey, which was otherwise considered too optimistic, could indeed materialise with the budgeted increase in infrastructure spending.

The Finance Minister in the 2020­-21 Budget had stated that she would bring down the fiscal deficit to 4.5% by 2025-­26. That means that in the next three years, the deficit will have to be

reduced by 1.9 percentage points. In keeping with this, the fiscal deficit for 2023-­24 is slated to come down to 5.9%. However, it will make the adjustment in the two years ahead that much harder. Although nine States will have elections this year, front­loading the adjustment would have eased the situation next year when the country has the next general election. Perhaps, the Finance Minister assumed that by propelling growth this year through higher capital expenditure, the fiscal adjustment will become easier in the next two years.

 

Compression in subsidies

The fiscal adjustment is proposed to be achieved by mainly containing revenue expenditure, which will improve the quality of public spending if it happens. The budgeted increase in revenue expenditures for 2023-­24 is just 1.2% higher than the revised estimate for the current year. There is a significant compression in subsidies. The fertilizer subsidy is expected to be reduced by ?90,000 crores from ?2.87 lakh crore to ?1.87 lakh crore. The policy to this effect was already made in December 2022 when the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) under which 5 kg of foodgrains were given from April 2020, in addition to the foodgrains given under the National Food Securities Act been discontinued.

Similarly, the fertilizer subsidy is expected to be compressed by ?50,000 mainly as fertilizer prices have come down. On the tax side, there is some tinkering of customs duty, and the overall protectionist stance has continued. On the personal income tax front, the attempt has been to incentivise taxpayers to move to the new tax regime with no concessions and lower rates. Even so, the increase in the number of tax brackets is cause for worry. Perhaps, it would have been preferable to move over to the new tax regime with fewer brackets. On the whole, this is a well­crafted Budget, but its success will depend on its implementation.

 

Union Budget FY 2023-2024 at a Glance:

• Per capita income has more than doubled to Rs 1.97 lakh in about nine years.
• In the last nine years, the size of the Indian economy has increased from the 10th to the 5th largest economy in the world.
• EPFO membership has more than doubled to 27 crores.
• In the year 2022, 7,400 crore digital payments worth ?126 lakh crore have been done through UPI.
• 11.7 crore household toilets were built under Swachh Bharat Mission
• Under the Ujjwala scheme, 9.6 crore LPG connections were given.
• 102 crore people were given Covid vaccination worth 220 crores.
• Minister Kaushal Vikas Yojana 4.0 will be launched
• Insurance covers 44.6 crore people under PM Suraksha Bima and PM Jeevan Jyoti Yojana.
• Cash transfer of ?2.2 lakh crore was made to over 11.4 crore farmers under the PM Kisan Samman Nidhi.

 

Budget

The budget is the blueprint for the government's 'expenditure', plans to levy taxes, and other transactions that affect the country's economy and the lives of its citizens. According to Article 112 of the Constitution of India, the Union Budget for a particular financial year is called the Annual Financial Statement (AFS). The Budget Division of the Department of Economic Affairs in the Ministry of Finance is the nodal body responsible for budget preparation. It is a statement of the estimated receipts and expenditures of the government in a financial year (which begins on 1 April in the current year and ends on 31 March of the next year). The first budget of independent India was presented in the year 1947.

 

The budget passes through six stages in Parliament

Budget presentation.

General Discussion.

Inquiry by departmental committees.

Voting on Demands for Grants.

Passing the Appropriation Bill.

Passing of Finance Bill.

 

Fiscal, Revenue, and Primary Deficits

• Fiscal deficit as defined is the difference between total expenditure, the sum of revenue receipts, and non-debt receipts. It shows how much the government is spending in net terms. Since a positive fiscal deficit reflects the amount of expenditure in excess of revenue and non-debt receipts, it needs to be financed by debt-generating capital receipts.
• The primary deficit is the difference between fiscal deficit and interest payments.
• Revenue deficit is derived by deducting capital expenditure from fiscal deficit.

 

The budget for the financial year 2023-24 is based on these seven priorities

1. Green Growth

2. Youth Power

3. Inclusive Development

4. Reaching the Last Mile

5. Infrastructure and Investment

6. Unleashing the Potential

7. Financial Sector

 

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