All budgets come with some crucial in-built assumptions, and the Union budget for FY 2023-24 is no exception to this. It has assumed that external conditions will not rock the boat. This is a bold assumption given recent experience and forecasts by international agencies about the clouds still hanging over the world economy. However, it is perhaps only fair to evaluate the budget assuming that Finance Minister Nirmala Sitharaman’s beliefs will prove to be correct.
The Economic Survey for 2022-23 has forecast a real GDP growth rate in the range of 6.0 to 6.8 percent, with a baseline projection of 6.5 percent, for the next financial year. The Union budget assumes a nominal growth rate of 10.5 percent, so the implicit assumption seems to be that inflation will be a modest 4 percent during the year. This is quite optimistic since the Reserve Bank of India (RBI) had earlier predicted a higher inflation rate at least during the first half of the year. The Monetary Policy Committee’s latest decision to raise the policy rate is a clear indication that inflation remains a concern for the RBI. The growth estimate itself reflects the assumption about stable external conditions.
Several features of the budget deserve praise. Perhaps the biggest positive of the budget is that there has hardly been any attempt at populism apart from a small sop to the middle class. This is no mean achievement with the general election just over a year away and several state elections to come this year. Another positive is that the Finance Minister has adhered to her principle of relying on large increases in capital expenditure to promote growth. The Centre’s capital expenditure will now stand at 3.3 percent of GDP – the average for the five years preceding the pandemic was 1.7 percent. This budgetary provision includes the extension of generous interest-free loans to state governments that was put in place in FY 2022-23. The Railways have also been provided with a very large increase (48.6 percent) in outlay.
The multiplier effects will hopefully translate into the creation of a significant number of blue-collar jobs. Another outcome of this huge increase in capital expenditure will be to increase private sector investment since most of the capital projects will be implemented through private contractors. The Finance Minister also deserves praise for avoiding any attempts to fudge or obfuscate data – this has not always been the case with Indian budgets.
The total central government expenditure in FY 2023-24 is estimated to be INR 45 trillion compared to the revised estimate of INR 41.8 trillion during FY 2022-23. This works out to an increase of just about 7.5 percent in nominal expenditure, which may seem strange given the massive increase in capital expenditure. This is because the government plans to slash expenditure on a range of subsidies.
First, food subsidies will go down since the free food grains scheme has been merged with the entitlements under the National Food Security Act – the difference between the budgetary estimate for next year and revised estimate for current year is almost INR 90,000 crore. Second, the costs of imported fertilisers are currently much lower than they were for a good part of the year and this is estimated to result in a saving of INR 50,000 crore during the next year. The government has also reduced allocation to the MGNREGA in the hope that growth in the economy will bring down demand for jobs under this scheme. Possibly, the Finance Minister will keep her fingers crossed throughout the year since all these are predicated on everything going well.
The Finance Minister has also chosen a degree of fiscal consolidation by pegging the fiscal deficit to 5.9 percent of GDP – this is a rather significant 0.5-percent reduction from the revised estimate for the current year. The budget does not contain any significant effort to raise additional tax revenues. However, the budget does assume a tax buoyancy of 1.2. This optimism is perhaps based on the record collections under the Goods and Services Tax (GST) during the current year. The budget also estimates a disinvestment target of INR 51,000 crore during the year. This amount is less than the budget estimate for FY 2022-23 but significantly higher than what has been achieved so far in the current year. Given the past experience, it would be somewhat foolhardy to bet on this disinvestment target being achieved.
The budget leaves the tax structure more or less unchanged – of course, it helps that indirect taxes come under the purview of the GST Council and so the budget itself cannot effect any changes in the structure of indirect taxes. In the past, there were frequent and unnecessary ad hoc changes in taxes. The departure from this unhealthy practice will promote a stable tax structure which is so important for private sector investment. The unchanging tax structure also means that there has been very little change in customs duties. Indian tariffs remain significantly higher than those in countries that are our competitors in export markets. This obviously raises the cost of inputs used by our export industries and so makes our exports goods relatively costlier. Lower tariffs would be a big boost to exports. To the extent that this may well lead to an increase in the volume of imports, it may even have only a marginal effect on tax revenues.
The overall tax-to-GDP ratio remains a rather modest and stagnant 11 percent over the years. The tax ratio is significantly lower than in most East Asian countries. Not surprisingly, this has attracted quite a lot of criticism, although there have been few concrete suggestions on how to improve the tax-to-GDP ratio. This is a major structural problem. Only about 5 percent of Indian households pay income tax. A large fraction of the population has incomes that fall below the exemption limit for personal income tax. Agricultural incomes fall outside the purview of central income tax though states can tax agricultural incomes. So, the tax base for direct taxes remains small. Perhaps increased compliance, and the relatively faster growth of the non-agricultural sectors will improve the tax ratio. In the longer run, a more equal distribution of incomes will also help bring more households into the direct tax net.
A consequence of the relatively low tax-GDP ratio is that the size of the state in the overall economy has become smaller. The process will be accelerated along with disinvestment and the shrinking size of public sector enterprises. The private sector will then have to take the lead in accelerating the growth process, with the state playing the role of a facilitator. This is perhaps as good a time as any to start this new phase of the economy with corporate and bank balance sheets looking relatively healthy. Of course, the state must continue to remain a strong presence in the economy in order to ensure that education and health are available to everyone.
The most disappointing aspect of the budget has been the neglect of the social sectors, particularly health and education. The budgeted expenditure on education and health have been increased by 8 percent and 3 percent, respectively, over the budget for FY 2022-23. But these increases are in nominal terms. Any reasonable assumption about the likely trajectory of prices during the year must imply only a modest real increase in the education outlay and an actual fall in real expenditure on health. This comes at a time when the aftereffects of Covid-19 still linger strong over the country. A focus on growth alone is particularly hard to justify at this point in time.
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