In Parliament House | Photo Credit: PTI
Budget for 2023-24 It has tried to fulfill the aspirations of different sections of the society. It is a good effort in a critical situation. But how far do the budget provisions go in meeting the two fundamental goals of growth and sustainability? Both must go hand in hand for sustainable development in the medium term, which will be the answer to many of India’s socio economic problems.
Budgetary Support for Development
Growth is influenced by the size of government expenditure and its revenue and capital components. Government expenditure is projected to increase by 7.5%, while nominal GDP growth is projected to decline from 15.4% in 2022-23 to 10.5% in 2023-24. Thus, total expenditure relative to GDP is shown to fall from 15.3% in 2022-23 (Revised Estimates) to 14.9% in 2023-24 (Budget Estimates). However, the composition of government expenditure will be positive growth.
The Centre’s budgeted increase in capital expenditure is 37% while it is only 1.2% in revenue expenditure. According to estimates by the Reserve Bank of India (2019, 2020), the multiplier attached to capital expenditure of the central government is 2.45, while the multiplier for revenue expenditure is 0.45. Investment expenditure by Central Public Sector Undertakings (PSUs) is estimated to decline by 0.2 percentage points.
However, central grants to states for creation of capital assets may result in an increase in capital expenditure of states, which is 1.2% of GDP, increasing the fiscal deficit ratio of states to 3.5% of GDP, and facility of 50 years interest- free loan for creating capital assets in 2023-24.
It is difficult to ascertain the extent to which states can utilize these facilities. Growth can also be boosted indirectly due to increase in personal disposable income after the tax slab adjustments implemented for the new income tax regime. The actual growth in 2023-24 could be a little over 6%.
external circumstances as the cause
As per the Fiscal Responsibility and Budget Management (FRBM) Act, amended in 2018, the Center is mandated to take appropriate steps to limit its fiscal deficit to 3% of GDP by March 31, 2021, though it Have an operational goal. The mandated target pertains to the debt-GDP ratio of the Center which is to be brought down to 40%. If there is a deviation from the fiscal deficit-GDP ratio of 3%, the Center is required to give reasons. In the Medium-Term Fiscal Policy cum Fiscal Policy Strategy Statement (MTFP), the Center has attributed the deviation from the budgeted 5.9% fiscal deficit-GDP ratio to external economic conditions. For this reason, the Center has not even given an estimate of GDP growth in the medium term.
Moreover, the Center has also not indicated the year by which it envisages reaching the fiscal deficit level of 3% of GDP. Instead, it has indicated that it will reach a level of 4.5% of GDP by 2025-26, calling for a sharp adjustment of 0.7 percentage points each over the next two years. It may take another two to three years to reach the 3% level. However, even by this time, the mandated debt-GDP ratio will not reach 40%. The debt-GDP level of net liabilities of the Center is estimated to increase from 55.7% in Budget 2022-23 (RE) to 56.1% in 2023-24 due to investments in special securities of states under the National Social Security Fund (NSSF). Happen). This increase is expected as the primary deficit as a proportion of GDP 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-to-GDP target of 40%. One implication of the high level of the Centre’s debt-GDP ratio is for interest payments relative to revenue receipts, which is budgeted at 41% in 2023-24. This significantly reduces the space for primary expenditure in the Union budget.
private investment
To spur growth in the medium term, there is a need to ensure that private investment grows relative to GDP. This requires that sufficient investible resources are left for the private sector after the pre-emptive claims of the public sector on these resources. Currently, total investible resources, with domestic sector financial savings accounting for about 8% of GDP and net foreign capital inflows accounting for 2.5% of GDP, can be estimated at 10.5% of GDP. In 2023-24, the fiscal deficit of the Center and the States, taken together, could be 9.4% of GDP. This implies that only 1.1% is available for the private sector and non-governmental public sector.
The Centre’s PSU investment itself is pegged at 1.1% of GDP in 2023-24, leaving little scope for state PSUs and the private sector. It is not responsible for creating an environment for a reduction in the interest rate. In fact, any attempt by the government to borrow more than the available investible resources can only lead to inflation. We know the dilemma faced by the government. Any reduction in the fiscal deficit would lead to reduction in expenditure which cannot be appreciated. However, we need a strong fiscal consolidation road map in the medium term.
C. Rangarajan is the former chairman of the Economic Advisory Council to the Prime Minister and former governor of the Reserve Bank of India. DK Srivastava is the Chief Policy Advisor at EY India and former Director of the Madras School of Economics. Views expressed are personal