Several factors influenced expectations from the Union Budget 2023-24. The big deal was that this was the last chance to present a full budget plan before the 2024 national election. So was it going to be completely populist? Or is 15 months before the election too early to spend political and financial capital? Thankfully the budget is far from populist. Fiscal deficit target below 6% of GDP is quite realistic. Though it could have been extended some more, as the financial situation is dire. The government debt to GDP ratio is above 85%, and gross borrowing is 15 trillion (i.e. over 40% of tax revenue) would move that mountain even higher. This will keep interest rates high, the pain of which is felt the most by the biggest borrower in the system, which is the central government. So fiscal consolidation is an imperative and a perennial missed opportunity. Another thing to remember is that in a year when inflation is still raging, you cannot use the extra spending to fight inflation. It does the opposite of what the monetary policy people are trying to do. Given all these constraints, the budget has done a reasonable balancing act.
The second macro background of this budget is the global slowdown. Most advanced economies will have zero or negative growth this year. How to respond then and make India more resilient? Here too, the budget has provided a boost to exports, encouraged capital inflows and reduced tariffs to some extent to correct inverted duty anomalies. The emphasis is on strengthening domestic consumption expenditure. Investment spending may also be affected by higher public spending. Thus, the capacity utilization number looks good enough to initiate an increase in private capex.
The third background is India’s wide income and wealth inequality. We do not need an Oxfam report to confirm this trend. The K-shaped recovery is in its third year, with a pick-up in consumer spending at the top-end while those on lower incomes face stagnation. Mercedes registered a growth of 41% but two-wheeler sales have been declining for three consecutive years, this year saw some rebound overall. Airline travel is booming, and so are five-star hotel services. But this cannot hide the pain of our rising unemployment and inflation. Inequality is like pollution. This is inevitable in a market-oriented capitalist economy. But beyond some reasonable level, it becomes detrimental to economic growth, as it scares away investors and increases social instability. Therefore, there was an imperative of the budget to increase the social security. In this sense, the budget has disappointed. The allocation for the National Rural Employment Guarantee (a proxy for unemployment insurance) has been drastically reduced. Similarly, allocation has been made for the National Health and Education Mission. The latter is probably because both of these are under state jurisdiction and more action can be expected in state budgets. The central government’s strategy seems to be focused on spending on public goods rather than giving external handouts that indirectly benefit the poor. Of course, the finance minister reminded us about the impressive achievements in financial inclusion through no-frills bank accounts, subsidized cooking-gas cylinders, toilets and so on. Even the dramatic expansion in the Centre’s low-cost housing scheme is in the same direction, and has the added benefit of being wealth-creating public expenditure. In that spirit, the increase in capital outlay, particularly on roads and railways, is quite welcome. This is one-fourth of the budget, the highest ever. The budget has also significantly increased credit flow to agriculture, which will lead to even greater capital formation.
The good news for the income tax payer was the increase in the threshold below which there is zero tax liability. Since high inflation has eaten away real purchasing power in the last three years, it was expected that the tax slabs, which are nominal, would be revised. but raising the bar 7 lakhs, which is 350% of the per capita income of the country (as mentioned by the FM himself) makes India a different. No other G20 country offers such generous exemptions to income tax payers. A few years ago the Economic Survey pointed out that there were only seven taxpayers for every 100 voters in India. This is in contrast to developed countries, especially the Scandinavian countries, where the ratio is almost the same. So widening the tax base is absolutely imperative, it seems to be ignored in every budget.
In fact, the share of indirect taxes in total tax collection is now placed at 55%, and rising. This is regressive and cannot be justified by indirect taxes like GST being easier to administer and collect. The Centre’s share in GST is now approx. 10 trillion, apart from still higher excise duty on petrol and diesel.
All this is an additional and disproportionate burden on the poor. The budget is not populist, but definitely expansionist. In that regard, it would create inflationary pressures, which would again hurt the poor more. If this Budget’s nominal growth target of 10.5% is achieved but inflation persists at 6%, real growth will be too weak to make a dent on unemployment and lower decade income growth. This is where the budget could have done more.
But ultimately the budget is an impossibly difficult balancing act, trying to please all and often conflicting constituencies, in a way trying to square a circle. In that it has been reasonably successful.
Ajit Ranade is an economist from Pune.
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