As per the latest Economic Survey, the Indian economy is set to achieve real GDP growth of 7% in 2022-23, with both retail and wholesale inflation expected to come down to below 6% in the coming months. Presented against this backdrop, the Union Budget projects a nominal GDP growth of 10.5% in 2023-24, which means an estimated inflation rate of only 4%, given the Economic Survey’s baseline real GDP growth rate of 6.5%. . This reflects official optimism about the Indian economy which remains in a macroeconomic headwind of declining inflation and high growth, even as the rest of the world experiences a growth deceleration with stable inflation.
The Economic Survey has predicted a new cycle of investment-led growth, led by the private corporate sector, supported by rising credit from banks coming out of bad loans after a visible cleanup of their balance sheets. However, instead of relying on such grandiose predictions, the Finance Minister has announced a rapid increase in capital expenditure in the Union Budget, particularly in infrastructure sectors such as railways, roads and power plants, to “crowd-produce” private investment. In” has demanded. On the other hand, subsidies on food, fertiliser, petroleum and interest subsidy along with outlays of welfare schemes like MNREGA have been drastically reduced, indicating an increase in the prices of food grains, LPG cylinders and fertilizers like urea in the coming days . The overall effect of such expenditure changes can be inflationary.
total cost decreases
A long-term assessment of the Union Budget is presented in Table 1, which enables us to compare the current government’s fiscal strategy in the post-pandemic period with the fiscal record of the UPA-II and NDA-I governments. As can be seen from Table 1, while total central government expenditure (annual average) fell from 15% of GDP during UPA-2 to below 13% during the NDA-1 government, the impact of COVID-19 The slowdown caused by the COVID-19 pandemic forced a substantial increase in total expenditure to 17.7% and 16% of GDP in 2020-21 and 2021-22, respectively. Total expenditure has since declined marginally to around 15% of GDP.
While capital expenditure has increased significantly since 2020-21, beyond the levels achieved by the UPA-II and NDA-1 regimes, subsidies on food, fertilizers and petroleum have been reduced from 2021-22. Defense expenditure, which averaged 2% of GDP under the UPA-II government budget and 1.6% of GDP under NDA-I, has come down to 1.5% of GDP in 2022-23. As a proportion of GDP, while expenditure on agriculture has increased during the tenure of the NDA-II government, mainly due to the PM-Kisan cash transfer scheme, the expenditure on education has declined significantly compared to the UPA-II era. The expenditure on rural development and health seems to have remained at the same level. The increase in capital expenditure is mainly concentrated in the transport and energy sectors.
tax status
Inadequate revenue, which remains a major constraint on public expenditure, has caused the government to cut subsidies and welfare expenditure to increase capex on infrastructure. Table 1 shows that gross tax revenue as a share of GDP increased from 10.2% in the UPA-II period to 10.8% under NDA-I and then nearly 10% during the first two years of the NDA-II government. fell by %. It is only in the post-pandemic period, from 2021-22 onwards, that gross tax revenue has crossed 11% of GDP.
It may also be noted that corporate tax collections as a share of GDP fell from 3.7% of GDP under UPA-II to 3.3% of GDP under NDA-I, and 2.3% of GDP. % and came down. 2020-21 follows the sharp corporate tax cuts introduced in 2019. The post-pandemic recovery has led to an increase in tax collections, but corporate tax collections to remain at 3.1% of GDP in 2022-23.
While corporate taxes in GDP have declined under the NDA regime, the share of income tax in GDP has progressively increased to reach 3% of GDP in 2022-23. Revenue from personal income taxes nearly equaling corporate tax revenue points to a regressive taxation regime, which may have forced the finance minister to provide some concessions to income tax payers in this year’s budget. However, against the backdrop of income tax collections of ₹8,15,000 crore (RE) in 2022-23 as per the Finance Minister’s speech, the revenue foregone on account of those concessions is estimated at only ₹35,000 crore. Further, the dual income tax regime with multiplicity of slabs has unnecessarily complicated the income tax structure.
Another regressive change in the taxation system under the NDA regime is the significant increase in indirect taxes. While the share of customs duty in GDP has fallen from 1.6% during UPA-II to 0.8% in 2022-23, the share of excise duty in GDP has increased from 1.7% under UPA-II (when GST was still in place) to be introduced) to 2% in 2020-21 and 1.2% in 2022-23, over and above the GST collection of over 3% of GDP by the central government. High excise duty continues to be imposed on petroleum-products, which keep fuel prices high. The rising share of income taxes in direct taxes and the rising share of indirect taxes in GDP has contributed to the observed increase in income and consumption inequalities.
The states’ share in central taxes had increased from 2.8% of GDP under UPA-II to 3.7% of GDP under NDA-I, due to the enhanced devolution formula recommended by the Fourteenth Finance Commission. Under the NDA-II government, however, the states’ share in central taxes has fallen to an annual average of 3.4% of GDP. This is mainly due to the increasing incidence of cesses and surcharges imposed by the central government, which has reduced the divisible pool, thereby depriving the states of more tax revenue.
Fiscal deficit was reduced from 5.4% of GDP under UPA-II government to 3.7% under NDA-I mainly due to reduction in expenditure. Under the NDA-II government, however, the deflationary fiscal stance was reversed in 2019-20. The fiscal deficit in 2020-21 reached 9.2% of GDP in the backdrop of the pandemic. While the finance minister has laid out a “fiscal consolidation path” with a target of bringing the deficit down to below 4.5% by 2025-26, the fiscal deficit targeted for 2023-24 in the current budget is 5.9%. The NDA-II government is unlikely to achieve the deficit target two years from now, without heavy expenditure compression or a sharp increase in revenue collection. Meanwhile, the central government’s interest and debt service, which declined from 3.2% of GDP under UPA-II to 3.1% under NDA-I, is set to rise to 3.6% of GDP in 2023-24 . (Happen).
stack against G-20
A comparison of India’s public debt position and fiscal balance (centre and states combined) with the G-20 emerging market average, based on the projections and estimates made by the IMF, is provided in Table 2. Projections show India’s public debt to reach 89% of GDP in 2020, while G-20 emerging market economies continue to decline and surpass India’s gross public debt-to-GDP ratio by 2026 Is. Despite India’s government revenue being significantly lower than the G-20 emerging market average, India’s public debt-to-GDP is projected to outperform the G-20 emerging market average due to higher projected GDP growth. It is an expectation that underlies the vision of the “Amrit Kaal” enshrined in the Union Budget – the utopia of a sustainable macroeconomic sweet-spot. If the projected GDP growth fails to materialise, the macroeconomic situation could change very rapidly like Adani Group’s debt-equity ratio.
Prasenjit Bose is an independent economist based in Kolkata. Indranil Choudhary teaches economics at PGDAV College, University of Delhi