The Union Budget for 2023-24 will be presented against the backdrop of weak private investment sentiment, elevated levels of inflation measured in terms of CPI-Combined, challenging unemployment rate, weak export growth and high levels of current account deficit.
Apart from these domestic shocks, there are threats from the global environment in terms of a projected recession in most parts of the world and higher inflation in most of the inflation-targeting economies.
Looking back, the persistence of the pandemic for the past three years has posed an unprecedented threat to the Indian economy and resulted in strong disruption in fiscal consolidation in terms of provisions enacted in the FRBM Act.
Deficit pressures
The fiscal deficit swelled to 9.2 per cent of GDP in 2020-21, twice the magnitude recorded in 2019-20. Thereafter, the government’s efforts were to reduce it to 6.9 per cent and 6.4 per cent in 2021-22 (Revised Estimates) and 2022-23 (Budget Estimates).
The reductions in the fiscal deficits in these two years were essentially revenue-led. Another important aspect while looking back is the higher provision of capital expenditure for 2022-23 — an increase of 24.4 per cent over the revised estimates of 2021-22. This was intended to boost economic growth as private investment is not picking up.
It is true that the pandemic brought us a higher level of deficit and debt as mentioned above. However, the fiscal situation in terms of the fiscal deficit to GDP ratio has consistently remained higher than the FRBM target of 3 per cent. During the period 2011-12 to 2019-20, it was in the range of 3.4 per cent and 5.9 per cent, indicating weak fiscal consolidation.
As set out in the Union Budget 2022-23, the fiscal deficit to GDP ratio would be reduced to 4.5 per cent in 2024-25 — a correction of 1.9 percentage points over a period of two years or a correction of 0.9 percentage points on an average during this period (2023-25). Thus, in an aggregate sense, taking into account the average correction of 0.9 per cent of the GDP, the Budget for 2023-24 could have a projected fiscal deficit of 5.5 per cent relative to GDP.
As for the revised estimates for 2022-23, we have the actual data for the period April-November 2022 published by the Controller General of Accounts.
The broad picture emerging out of the fiscal position for April-November is as follows: (a) higher provision of capital expenditure (59.6 per cent of the Budget Estimates, against 49.4 per cent in corresponding period of previous year); (b) slowdown in tax revenue (63.3 per cent of the Budget Estimates as against 73.5 per cent in corresponding period of previous year) and non-tax revenue (73.5 per cent of the Budget Estimates as against 91.8 per cent in corresponding period of previous year), leading to a slowdown in revenue receipts (64.6 per cent of the Budget Estimates as against 75.9 per cent in corresponding period of previous year); (c) Higher realisation of non-debt capital receipts (52.3 per cent of the Budget Estimates as against 11.0 per cent in corresponding period of previous year) and (d) slowdown in revenue and higher provision of capital expenditure led to a higher fiscal deficit (58.9 per cent of the Budget Estimates as against 46.2 per cent in the corresponding period of previous year).
Now let us turn to the scope for fiscal correction in the Revised Estimates. Traditionally, in the budget making process, grants-in-aid to States for capital assets and capital expenditure are kept higher in the Budget Estimates and are reduced in the Revised Estimates since they are mostly discretionary in nature.
However, in the context of boosting economic growth through infrastructure investment and fostering cooperative fiscal federalism, any large reduction in these two items will raise eyebrows.
Thus, what is left is revenue-led fiscal consolidation, largely by higher receipts, in direct and indirect taxes, increasing tax buoyancy through better tax compliance.
Overall, it looks like there is no scope for large-scale fiscal correction.
Infra thrust
The focus of Budget 2023-24 should be to further continue higher provisions in infrastructure investment, because of higher fiscal multipliers for capital expenditure. In India, the multiplier effect of capital expenditure made by the Centre is estimated at 2.45 in a period t and 3.14 in a period t+1, implying that the fiscal multiplier will increase from 2.45 to 3.14 in two consecutive years (the RBI Bulletin, December 2020).
The Budget could have higher provisions for disinvestments for reduction in the fiscal deficit going by the trend of 2022-23 in this context. It should support the MSME sector as this sector has been instrumental in enhancing manufacturing production, employment and export.
In addition, the Budget should have an institutional arrangement for skill development for entrepreneurs in this sector.
It is heartening to note that agriculture has supported economic activity (Gross Value Added or GVA Growth) during the pandemic. This sector also supports employment.
The Centre announced a new integrated food security scheme, allowing provisions of free foodgrains (5 kg per person per month to priority households and 35 kg per household per month to the Antyodaya Anna Yojana beneficiaries) to about 81.35 crore beneficiaries under the National Food Security Act (NFSA) for one year from January 1, 2023. The Budget should increase the provision of free foodgrains per person along with the number of beneficiaries.
To conclude, the pandemic has put unprecedented fiscal stress and left no scope for any quick return to fiscal consolidation as enacted in the FRBM Act.
However, we suggest the following: (a) mobilise larger amounts of non-debt resources by enhancing tax buoyancy through simplified and improved compliances and (b) prioritisation of expenditure towards the key developmental sectors viz., health, education, drinking water and sanitation, agriculture, rural development etc. to boost sustainable growth and employment.
The writer is a former central banker. Views expressed are personal (Through The Billion Press)