 "Investing, not saving")
Finance ministers have become quite adept at managing initial reactions to the presentation of each year’s Union Budget, creating a sense of mild euphoria on the stock market and in TV studios. Those last long enough for most people to ignore any messages that surface subsequently from the fine print. Nirmala Sitharaman has certainly played true to this rule-book by creating excitement over cuts in income-tax rates. The net benefit to taxpayers will be less than initially announced once one includes in the calculation the removal of various tax exemption schemes. So, while the finance minister said she had foregone revenue of Rs 35,000 crore, her assumption on the percentage growth in income-tax revenue next year is the same as for corporation tax revenue: 10.5 per cent. In practice, therefore, 2023-24 may end with no real loss to the exchequer. That would be just as well, because there is something innately wrong with a tax floor that is multiples of the average income per head or even per family. Few countries have such a high tax-exemption limit.
When one looks at the numbers dispassionately, what becomes clear is that the fiscal correction that has been announced was in fact done just over a month ago, when the Covid-related supply of free foodgrain was stopped. That, along with the savings on the fertiliser subsidy, accounts for the bulk of the proposed deficit reduction by 0.5 percentage points of gross domestic product (GDP). There is virtually no additional fiscal correction in what was presented to Parliament on Wednesday. Indeed, if (as correctly stated in the Economic Survey) economic output has recovered from the Covid setback and is now growing, one needs to understand why the fiscal deficit has not gone back to the level of 2019-20, the pre-Covid year. It was 4.6 per cent of GDP then, but is 5.9 per cent for next year.
The explanation is that the government has gone in for another massive dose of capital investment, while curtailing non-interest revenue expenditure. Such public investment is the signature imprint of the second Narendra Modi government, with capital outlay climbing by an impressive 150 per cent in five years. In terms of desirable fiscal policy, this is of course what the doctor would have ordered: Deficits should finance not consumption but investment (including in the social infrastructure like health and education, which continue to suffer relative neglect). That said, there is a cost to keeping the deficit high, and it shows up in the expanding interest bill, which is projected to increase by 14.8 per cent next year, on top of 16.8 per cent this year. The public debt too has been growing. Some restraint on capital expenditure in order to reduce the deficit, interest outgo, and level of public debt would have been desirable, along with a re-balancing of “capital” expenditure to include social capital.
To take the point further, consider the railways, which has received yet another massive increase in capital outlay, equal almost to the annual railway revenue. Although it is encouraging that such revenue has been growing, after a period of stagnation, the rail system still does not generate surpluses for capital investment and depends almost wholly on budgetary support, the scale of which is clearly aimed at transforming the system. But most of freight revenue continues to come from moving bulk goods (coal, iron ore, foodgrain, cement, etc), while the bulk of the passenger revenue comes from the traditional second and sleeper classes in mail and express trains and from the three-tier air-conditioned class. The growth of new and higher classes of travel (for example, the admirable Vande Bharat trains) and of new categories of higher-value freight are yet to happen in any meaningful way. One is left wondering, therefore, about the gestation period before returns kick in and the opportunity cost. Could some of the money be better spent elsewhere?
The government’s answer to such questions is familiar: Capital investment by the government is required to prop up economic growth until private investment kicks in. And it is not that “soft” investment is being ignored. In the Budget for next fiscal year, there are substantial increases in the outlays for the National Education Mission and the Pradhan Mantri Awas Yojana (Grameen). But the Jal Jeevan Mission looks like it is getting a big increase only because the allocations will remain unspent in the current year. Defence too has got only a small increase in outlay (with close to a quarter of the Budget going to pensions), and there are outright cuts for the Pradhan Mantri Swasthya Suraksha Yojana and the rural employment guarantee programme (for the second year in a row). No one should object to the relative generosity shown to information technology and telecom, and also green energy, because these are the government’s thrust areas, but when one looks at the total picture some re-balancing would seem to have been in order.
That said, it remains to the government’s credit that the fiscal deficit has been cut again, and the public borrowing programme kept in check. That should keep the government pre-emption of resources under control, and leave more money for the private sector at hopefully lower interest rates than would have been the case otherwise. All of that should fuel private investment as well as consumption, and help to sustain the economic growth rate of a global outlier. Additionally, if tax revenues end up being more buoyant than budgeted because the economy does well, such a bonus should be used to trim the deficit, not spent on pre-election giveaways as was done in cavalier fashion in 2019. As things stand, there is a 1.4 percentage point deficit cut, which needs to be effected in the two remaining years to 2025-26 if that year’s target of 4.5 per cent is to be met. Prudence would recommend that the task not be heavily back-loaded.