A Budget that signals growth with stability

Why in News?

• The Union Budget 2023-24 comes at a time when the world is facing a sequence of shocks - Covid-19, the Russia-Ukraine war, the recession in major economies, the rise in inflation fueling interest rates hike, exodus of capital and pressure on the exchange rate.
• The article highlights how the Union Finance Ministry’s balancing act (like increasing infrastructure spending while continuing with fiscal consolidation) amid global and domestic challenges, has given India a well-crafted Budget.

 

What dilemma the Government is facing?

• According to the Economic Survey 2022-23 (released a day before the Budget), the Indian economy is on a broad-based recovery path.
• Even though it has staged a recovery and surpassed the pre-pandemic income level, the economy is still 7% below the pre-pandemic GDP trend.
• At the same time, inflation is still beyond the upper tolerance limit and aggregate fiscal deficit (Centre and States) is still in the range of 9% to 10% of GDP
• Growth has to be fuelled by increasing public investment and 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.

 

Signs of Relief for the Indian Economy

• Interestingly, the fiscal deficit limited to 4% of GDP in the current fiscal has come despite a sharp increase in food and fertiliser 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 nominal GDP.
• The Budget estimate had assumed the nominal GDP for 2022-23 at ₹258 lakh crore whereas the first advance estimate of GDP 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 as part of the Union Budget 2023-24

Making a greater allocation to infrastructure spending:

• 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 (RBI) 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.
  • This will also arrest the declining trend in the overall investment-GDP ratio in the country.
• Further, the continuation of the interest-free loan to States to augment their capital expenditures should help in increasing States’ capital expenditures as well.

 

 Compression in subsidies:

• The fiscal adjustment is proposed to be achieved by mainly containing revenue expenditure, which will improve the quality of public spending.
• 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. For example,
  • The food subsidy is expected to be reduced by ₹90,000 crore from ₹2.87 lakh crore to ₹1.97 lakh crore.
  • The fertiliser subsidy is budgeted to be reduced from ₹2.25 lakh crore in 2022-23 (RE) to ₹1.75 lakh crore in 2023-24 (BE) - budgeted lower by ₹50,000 crore, mainly as fertiliser prices have come down.
• The policy to this effect has already been made recently by discontinuing the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) under which 5 kg of food grains were given in addition to the National Food Securities Act.

 

Other steps:

In addition, allocation to centrally sponsored schemes is expected to come down marginally by about ₹20,000 crore and the overall current transfer to States is kept constant at 3.3%-3.4% of GDP.

 

Why this Balancing Act in the Budget 2023-24?

• In the 2020–21 Budget, the Finance Minister promised to reduce the fiscal deficit to 4.5% by 2025–26.
• Thus, 9 percentage points of the deficit must be cut during the following three years. Accordingly, the fiscal deficit is expected to decrease to 5.9% in 2023–2024.
• It will, however, make the adjustment in the upcoming years much more difficult as the nine States will conduct elections this year and the nation has general elections next year.
• As a result, the Finance Ministry may have thought that by boosting growth this year through larger capital investment, the budgetary adjustment would be simpler over the following two years.

 

Conclusion

• 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.
• On the whole, this is a well-crafted Budget, but its success will depend on its implementation.

 

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Q1) What is capital expenditure in Indian budget?

Capital expenditure is the money spent by the government on the development of machinery, equipment, building, health facilities, education, etc. It also includes the expenditure incurred on acquiring fixed assets like land and investment by the government that gives profits or dividend in future.  

 

Q2) What is crowding in and crowding out effect?

Crowding in effects relates to how higher government spending encourages firms to invest more whereas crowding out effect refers to how higher government spending financed by borrowing leads to a fall in private sector saving.

 

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Source: A Budget that signals growth with stability