The Union Budget 2023-24 ticked all possible boxes and was carefully balanced for the year’s macroeconomic consideration. The gross fiscal deficit (GFD) at 5.9 per cent of GDP and the gross market borrowing of ₹15.93-lakh crore (including T-bills) was in tune with market expectations.

A fiscal consolidation of 0.5 percentage points of GDP in an election eve Budget cannot be considered bad at all, especially when we have seen in past profligacy and populism taking over on such occasions. The Budget had credible maths with assumed tax buoyancy of unity, tax elasticity of 1.2 and a nominal GDP growth of 10.5 per cent.

On the spending side, the saving in subsidies of nearly ₹1.6-lakh crore should be doable if the government keeps a tight leash on FCI functioning. However, the only one downside I see is that the Budget did not provide a multi-year fiscal policy path.

Medium term vision

While the Budget is good in direction, the consolidation path from a multi-year perspective remains blurred. While the GFD/GDP target of 4.5 per cent by 2025-26 was reaffirmed, its achievement is contingent on faster consolidation by 70 bps a year over the next two years.

Even if achieved, the GFD will average 5.8 per cent during the five-year period of the 15th Finance Commission, a clear slippage from an average of 5.0 per cent envisaged in its fiscal consolidation path.

The use of escape clauses since 2018-19 has enervated the FRBM Act in spirit. The key question then is how do we reframe fiscal policy to generate fiscal space and avert risks of debt reaching unsustainable levels if more macro-shocks follow? To the credit of the central government, it has come out of pro-cyclical fiscal policies that prevailed in yesteryears. However, is our fiscal policy countercyclical enough? Can we create fiscal space to make it so?

The Euro example

Euro area is illustrative of front-loaded fiscal consolidations. It has time and again undertaken front-loaded fiscal consolidations to improve the power of countercyclical fiscal policy. After posting a general government fiscal deficit of 6.2 per cent and 6.3 per cent in 2009 and 2010 respectively, the Euro Area rapidly improved its finances to reduce the deficit to as low as 0.4 per cent in 2018.

This allowed the region to then expand its fiscal deficit to 7 per cent in 2020 to tackle the pandemic, which was then lowered again and is likely to be 3.5 per cent in 2022. Some observers have said that this is not a fair comparison to make as India, unlike the advanced economies is far below full employment.

The truth is that the Euro area did this consolidation during 2011-18, which was a period when its average unemployment rate was 10.5 per cent. In each of the years, the unemployment rate was about double its non-accelerating rate of unemployment (NAIRU). It also ran negative output gap in each of these years, averaging 1.7 per cent of its potential GDP.

It prioritised macro-stability by and ran primary surpluses (GFD minus interest payments) since 2015; creating fiscal space that came in so handy when the pandemic struck.

Currently, India neither runs a negative output gap, nor does it have any significant labour market slack at an unemployment rate of about 7 per cent. The moral of the story is that there is no perfect time to undertake fiscal consolidation to create policy space. If one must be prepared to meet future black swan events, then one must move to eliminate primary deficits now.

Downsize government

Is more aggressive fiscal consolidation possible? My simple answer is yes. Large savings are possible in establishment expenses, mainly salaries and pensions, if the government is prepared to downsize itself structurally. These expenses account for 17.5 per cent of the total expenditure. ₹2.5-lakh crore could be saved if it cuts these expenses by half, even while leaving pensions untouched.

But for this, the government must be prepared to restrict itself to functions where it can provide more efficient services. This itself will enable a 30 per cent cut in revenue deficit, not counting the massive gains of lowering fiscal deficit attainable through asset monetisation of its land and building assets at prime places. But does it have the will to undertake these administrative reforms?

We cannot forget that the general government deficit of about 9.5 per cent and general government gross debt-to- GDP ratio of about 84 per cent makes India one of the three most fiscally imbalanced G20 emerging economies along with Brazil and China.

Capex push

The Centre deserves kudos for breaking out of ultra-low share of capital expenditure in total expenditure that had averaged 12.6 per cent for 16-years during 2005-06 to 2020-21. If the Budget estimates of this year are realised, that capex share in overall spending would have gone up by 2.6 times in just three years, which is no mean achievement. Railway capex has seen a massive jump in this Budget, but there is a need to push asset monetisation in Railways that was nearly a non-stater last year.

The capex by States and the PSUs has been rather disappointing in recent years. It is a bunker mentality from needed reforms when we cite that public sector capex is substituting private sector in an era of risk-off. After all, the public sector including States and PSUs accounts for just about a quarter of the capex.

So, while the Budget has done its job creditably well, the results depend on execution while we wait for more opportunistic times for fundamental fiscal reforms.

The writer is Professor of Practice at IIM, Kozhikode and former MPC member. The views expressed are personal