A bold step was needed, the Budget missed it

The Union budget for 2023-24 came against a backdrop of economic recovery and optimism in the medium-term growth outlook despite persistent global recessionary winds. The Budget speech of the Finance Minister recognised the constraints, saying this performance was about “resilience amidst multiple crises”. There are indeed a number of threats to macroeconomic stability, particularly that of inflation, and the hazards of a projected recession and high inflationary trends in most parts of the world. The International Monetary Fund in its update on the World Economic Outlook released on January 30^th, 2023 has mentioned “inflation picking-up amid low growth”. These global developments will pose a threat of “spill-overs” to Indian economic development in terms of lesser capital inflow, lower inward remittances, reduced exports and imported inflation.

However, India’s economy is relatively insulated from global threats when compared to other emerging market economies partly because of its large domestic market and relatively looser integration in global value chains and trade flows. In contrast to the pre-pandemic years of 2018-19 and 2019-20, there is evidence of a strengthening of balance sheets by Indian corporates and the financial sector which provides “a solid underpinning to growth”.

Sooner or later, the revenue deficit should be eliminated to ensure sound and prudent fiscal management

Apart from this, “India’s public digital infrastructure expansion is leading to accelerated financial inclusion for low-income households, micro and small businesses and the economies rapid formalisation”. This is observed in the statement of fiscal policy released with the Union Budget 2023-24. Balance sheet strength and digital advancement are growth differentiators not only for 2023-24 but also in the years ahead.

Recognising that uncertainties in the world economy will continue this year, the budget has focussed on the domestic economy, particularly macroeconomic fundamentals. In this context there are seven priorities (or “Saptarshi” as the Budget puts it) which include Inclusive Development, Reaching the Last Mile, Infrastructure and Investment, Unleashing the Potential, Green Growth, Youth Power and the Financial Sector. These seven areas which complement each other are designed to enhance growth with the inclusion of the population at the bottom of the pyramid.

Amidst severe fiscal stress, the Budget has still attempted fiscal correction and consolidation by reducing the fiscal deficit to 5.9% of GDP against 6.4% of GDP in 2022-23 and the revenue deficit is budgeted at 2.9% of GDP as compared with 4.1% of GDP in 2022-23. The correction in the revenue deficit has been budgeted with a reduction in all subsidies (fertiliser, food and petroleum) together amounting to 3,74,707 crore from 5,21,585 crore in the revised estimate for 2022-23, recording a decline of 39.2%.

It is important to mention here that due to the unprecedented levels of borrowing during the pandemic (9.2% of GDP in 2020-21 and 6.7% of GDP in 2021-22), the interest payment has been projected higher at Rs. 10,79,971 crore recording an increase of 14.8% over 2022-23 revised estimates. At this level, the interest payment to GDP is budgeted at 3.6%. In view of this a sharper fiscal correction and quick return to a 3% fiscal deficit to GDP is desirable.

The Budget has given priority to boost growth through capital investment (of Rs.10,00,961crore) which has recorded a growth of 37.4% over the revised estimate of 2022-23. At this level, the capital expenditure is budgeted at 3.3% of the GDP. This shows nearly 56% of the borrowings are budgeted to be spent on capital expenditure. A higher revenue deficit continues to be a drag on the Union Budget in terms of providing growth induced expenditure. Sooner or later, the revenue deficit should be eliminated to ensure sound and prudent fiscal management.

Balance sheet strength and digital advancement are growth differentiators not only for 2023-24 but also in the years ahead

With regards to the receipt side, the gross tax revenue is projected to grow at 10.4% in the Budget for 2023-24 over the 2022-23 revised estimate. The direct tax is budgeted to increase at 10.5% and indirect tax is budgeted to grow at 10.4%. The overall tax buoyancy is estimated at 0.99. GST has been a game changer and the GST buoyancy is estimated at 1.14 during 2023-24. It is important to note that the tax to GDP ratio is budgeted at 11.1% the same level of 2022-23 revised estimates. Our tax to GDP ratio is low; this needs to go up at least by 2% with better tax compliance and an increase in the tax base. If this happens, a return to the 3% fiscal deficit to GDP will be quicker along with a sharper correction in revenue deficit.

Another important aspect is the selling of assets of public sector units. The entire move has been weak. This needs to be corrected.

To strengthen cooperative fiscal federalism, the budget has provided financial assistance to the States for capital expenditure to the tune of Rs. 1.30 Lakh Crore representing an increase of 30% over allocations of the 2022-23 budget estimate and accounting to around 0.4% of GDP. Secondly, there has been a substantial increase in the share of States in the revised estimates of 2022-23 to Rs. 9.48 lakh crore from Rs. 8.17 lakh crore in the budget estimate. However, the 15^th finance commission recommendation was of providing 41% of tax devolution from the divisible pool of tax. The budget for 2023-24 has provided to the States Rs. 10.21 lakh crore. Thirdly, there are the transfers to States in terms of centrally sponsored schemes (CSS), finance commission grants and other loans and grants together (Rs. 9,89,337 Crore) accounting for 30% of the total expenditure or 3.2% of GDP.

As mentioned in the Government’s Economic Survey 2022-23, the Indian economy is poised for a potential growth of 7 to 8% in the medium term. The current growth rate at 7% is the among the highest in the world. But to remain ahead and in a “bright” position, prudent and strong fiscal management in terms of 3% of the fiscal deficit to GDP is an essential prerequisite especially for attracting Foreign Direct Investment. However, the Union budget 2023-24 has been conservative in fiscal correction and consolidation. This is where a bold step was required. It is sorely missing.

(The writer is a former central banker. Views are personal)