On 1 February, Finance Minister Nirmala Sitharaman presented her fifth consecutive budget, the last full budget in Prime Minister Narendra Modi’s second term. In this period, the nature of the Union Budget has changed. It is a statement of estimated receipts and payments presented to the Parliament as prescribed in Article 112 of the Constitution. However, it is no longer seen as an instrument for short-term macro-management of the economy. Instead, it has become a political statement of the government’s long-term economic objectives. Nevertheless, it has wider economic implications and consequences.
This budget is being praised a lot in the media. Economic conservatives are relieved that, despite elections on the horizon, fiscal extravagance and political populism are completely absent. But a different perspective suggests that both of these can also be a cause for concern.
As a percentage of GDP, gross fiscal deficit is projected to decline from 6.4% in 2022-23 (Revised Estimates or RE) to 5.9% in 2023-24 (Budget Estimates or BE), while revenue deficit is expected to decline from 2022-23 Fall is expected. 4.1% to 2.9%, so as to reduce the proportion of government borrowing to finance consumption expenditure from two-thirds to half. These levels should worry fiscal conservatives.
My concern is about the nature of the fiscal adjustment. The increase in total government expenditure between 2022-23 (Revised Estimates) and 2023-24 (Budget Estimates) is 41.9 trillion to 45 trillion (7.5%), of which revenue expenditure from 34.6 trillion 35 trillion (1.2%), and that’s from capital expenditure 7.28 trillion to 10 trillion (37%). In comparison, nominal GDP is expected to increase by 10.5%. An increase in capital expenditure, especially on infrastructure, is both necessary and desirable, but it is no substitute for private investment and consumption expenditure, given that public investment is only one part of total investment at 30% of GDP. a quarter, while private final consumer spending is as much as 60% of GDP. Such budget allocation is bound to have a contractionary effect on aggregate demand in the economy.
The problem may arise for three reasons. First, export demand is set to slow as the global economy slows due to supply-side disruptions caused by the COVID pandemic and the Ukraine war, and sharp hikes in interest rates by central banks everywhere to combat inflation. Second, private investment in India is driven more by the household sector than by the corporate sector, where investment has been low despite rapidly rising profits and may now be crowding out higher interest rates and government market borrowing to meet its deficit. Is. Third, the slowdown in economic growth that began before the pandemic and lower incomes of poor households in rural India as well as in urban India in recent years has constrained domestic consumption demand.
The proposition that India will be the fastest growing economy in the world this year and next provides illusory comfort. The reality of recent times is worrying. During 2014-15 to 2018-19, Modi’s first term as PM, the GDP growth at constant prices from 2011-12 was 7.5% per annum. This growth rate fell sharply to 3.7% in 2019-20 and -6.6% in 2020-21, but rose from its low base to 8.7% in 2021-22. Yet, between 2018-19 and 2021-22, at constant 2011-12 prices, GDP grew by only 1.5% (0.5% per year), while per capita GDP grew at roughly the same pace. Even though it may have gone unsaid, the government should be mindful of this sharp slowdown, and it is expected that its big step up in capital expenditure will be- 2.4 trillion on railways and 1.62 trillion on roads- will revive economic growth. This expectation will prove to be false as the use of capital-expenditure allocation on infrastructure slows and reduces supply constraints with time lag, so that it can stimulate growth in the medium term. In the short term, only consumption demand can drive growth. Alas, the budget may be over.
Per capita income is a statistical average that does not measure the well-being of the poor. Given the reality that the post-pandemic recovery is K-shaped, and that income inequality in India is now among the highest in the world, with rising unemployment and high inflation, it is likely that the poor will probably fare worse in 2021-22. were off as compared to 2018-19. The crisis is greater in rural India as wages and farmer incomes have stagnated or declined in recent years. In such a situation, budget allocation is a matter of concern. has been dropped from the MNREGA outlay 1.1 trillion in 2020-21 0.98 trillion in 2021-22, 0.89 trillion in 2022-23 and 0.6 trillion for 2023-24 when on average, its wages are two-thirds of the market wages. For 2023-24, the outlays for agriculture, rural development and PM-KISAN remain almost unchanged. Large outlays in these would have supported essential consumption in rural India. This would not have been populism, but an economic necessity for the poor and thus a political compulsion for the government. The consumption demand thus created could spur growth.
The moral of the story is simple. Supply-side actions operate with a time lag and cannot kick-start growth in a demand-constrained economy. If the Union Budget seeks to revive growth, it may turn out to be an elusive find.
Deepak Nayyar is Emeritus Professor of Economics, Jawaharlal Nehru University
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