Daily Editorial Analysis for 08th February 2023

Fiscal consolidation in the context of the Budget

Context

The Budget for 2023­-24 has attempted to address the aspirations of different segments of society. It is a good effort in a difficult situation.

Key Highlights

• Changes in the new income tax regime (in rebate limit and in tax slabs).
• A 33% increase in capital investment outlay has been proposed, raising it to Rs 10 lakh crore (the biggest in the past decade).
• Changes in customs duty; reduced on import of certain inputs for mobile phone manufacturing, shrimp feed etc. and increased on cigarettes, gold articles, compounded rubber etc.
• Capital outlay for the railways increased to the highest ever – Rs 2.40 lakh crore.

Budgetary support to growth

• Growth is affected by the size of government expenditure and its revenue and capital components.
• Government expenditure is budgeted to grow at 7.5% while nominal GDP growth is estimated to fall from 15.4% in 2022­23 to 10.5% in 2023­24.
• The total expenditure relative to GDP is shown to fall from 15.3% in 2022­23 (RE) to 14.9% in 2023­24 (BE).
• The composition of government expenditure, however, would be growth positive.

Capital expenditure

• Increase in the Centre’s capital expenditure is budgeted at 37% while that in revenue expenditure is only 1.2%.
• According to estimates by the Reserve Bank of India (2019, 2020), the multiplier associated with central government capital expenditure is 2.45, while that for revenue expenditure is 0.45.
• Investment expenditure by central public sector undertakings (PSUs) is budgeted to fall by 0.2% points.

State Capital Expenditure

• State capital expenditures may increase as a result of central grants to the States meant for capital asset creation amounting to 1.2% of GDP, augmentation of States’ fiscal deficit to GDP ratio to 3.5%, and the facility of 50 years of interest free loans for creating capital assets in 2023-­24.
• It is difficult to ascertain the extent to which States might utilize these facilities.
• Growth may also be stimulated indirectly due to an increase in private disposable incomes following tax slab adjustments applicable to the new income tax regime.
• Real growth in 2023­24 may be a little above 6%.

External conditions as reason

Fiscal Responsibility and Budget Management (FRBM) Act,2003

• According to the Fiscal Responsibility and Budget Management (FRBM) Act, as amended in 2018, the Centre is mandated to take appropriate steps to limit its fiscal deficit to 3% of GDP by March 31, 2021 although this is an operational target.
• The mandated target pertains to the Centre’s debt­GDP ratio which is to be brought down to 40%.
• If there is a deviation from the fiscal deficit­ GDP ratio of 3%, the Centre is required to state the reasons.
• In the Medium term fiscal policy cum Fiscal Policy Strategy Statement (MTFP), the Centre has attributed the deviation of the budgeted 5.9% fiscal deficit­ GDP ratio to external economic conditions. For this reason, the Centre has also not provided the medium ­term GDP growth forecasts.

Centre’s Target

• The Centre has not indicated the year by which it envisages reaching a fiscal deficit level of 3% of GDP.
• It has indicated that a level of 4.5% of GDP would be reached by 2025-26, calling for a steeper adjustment of 0.7% points each in the next two years.
• It might require another two to three years for reaching a level of 3%.
• The mandated debt­GDP ratio of 40% would not be reached.
• The Centre’s debt ­GDP level net of liabilities on account of investment in special securities of states under the National Social Security Fund (NSSF), is budgeted to increase from 55.7% in 2022­23 (RE) to 56.1% in 2023­24 (BE).
• This increase is expected as the primary deficit to GDP ratio is indicated at 2.3% in 2023­-24.
• The MTFP statement does not indicate the year by which the government aims to reach the mandated debt­ GDP target of 40%.
• One implication of the high level of Centre’s debt­ GDP ratio is for interest payments relative to revenue receipts, which is budgeted at 41% in 2023­-24.
  • This reduces, significantly, the space for primary expenditure in the Centre’s budget.

Private investment

• Investment of the Centre’s PSUs themselves amount to 1.1% of GDP in 2023­-24, leaving little scope for State PSUs and the private sector.
• It is not amenable to creating an environment for interest rate reduction.
• Trying to borrow beyond the available investible resources by the government can only lead to inflation.
• For raising growth in the medium term, augmentation of private investment relative to GDP needs to be ensured.
• It requires that enough investible resources are left for the private sector after the public sector’s pre­emptive claim on these resources.
• At present, total investible resources, consisting of financial savings of the household sector amounting to about 8% of GDP and net foreign capital inflows amounting to 2.5% of GDP, may be estimated at 10.5% of GDP.
• The central and State fiscal deficits considered together may amount to 9.4% of GDP in 2023­-24.
• It implies that only 1.1% is available for the private sector and the non­-government public sector.

Conclusion

Any reduction in the fiscal deficit will cut expenditures which may not be appreciated. We need, a stronger fiscal consolidation roadmap over the medium term.