Fiscally prudent, but electorally savvy

The number in Finance Minister Nirmala Sitharaman’s fifth Budget, which has not received as wide an attention as it deserved, pertains to the revenue deficit she has projected for 2023-24. After having brought down the revenue deficit from 4.4 per cent of gross domestic product (GDP) in 2021-22 to 4.1 per cent in 2022-23, she has now proposed a steeper reduction to 2.9 per cent in 2023-24. Barring the post-pandemic year of 2021-22, when the revenue deficit fell by 2.9 percentage points in one year, this reduction of 1.2 percentage points is the steepest in at least 10 years.

The government’s revenue deficit reflects the gap between its total revenue receipts (both tax and non-tax revenue) and its revenue expenditure. In 2022-23, the finance minister hopes to grow her net revenue receipts by 8 per cent even as her revenue expenditure would increase by a similar rate. But for 2023-24, she projects a 12 per cent rise in net revenue receipts, but hopes to rein in revenue expenditure within a growth rate of just 1.2 per cent. That is how the revenue deficit is expected to be slashed to 2.9 per cent of GDP in 2023-24.

 

If the fiscal deficit target for next year has not seen a similarly steep reduction (it has been pegged at 5.9 per cent of GDP, compared to 6.4 per cent achieved in 2022-23, along with the commitment that it would be down to 4.5 per cent before 2025-26), it is primarily because the government has gone in for a huge outlay increase of 37 per cent in its capital expenditure to Rs 10 trillion in 2023-24, or about 3 per cent of GDP. Clearly, the finance minister has banked heavily on capital expenditure to keep the growth engine revving at the rate of 6.5 per cent, projected by the Economic Survey for 2023-24.

It was possible for Ms Sitharaman to scale down the capex outlay and show an even lower fiscal deficit target for next year. That she chose not to follow that path of a faster fiscal deficit reduction seems to be because in her calculation, the post-pandemic recovery in private sector investment is still incipient and the government needed to chip in with higher outlay to crowd in private investment and push up the overall investment rate in the economy to the desired level. That’s a conscious bet the finance minister has taken, even though she must have been conscious that maintaining a much higher fiscal deficit, compared to that in the pre-pandemic years, would entail higher interest costs for the entire economy.

There is yet another risk that the finance minister took while preparing the final full Budget for the second Modi government. Reining in the growth in revenue expenditure to only 1.2 per cent will be a difficult task in a year when nine Assembly elections are scheduled to be held, leading up to a general elections in May 2024. While presenting the 2022-23 Budget last year, the finance minister had projected a less than one per cent increase in its revenue expenditure over the previous year. But now the revised estimate shows that the revenue expenditure in the current year has grown by 8 per cent.

The finance minister’s plan to keep its revenue expenditure under tight control even in 2023-24 is, therefore, ambitious as barring the Jal Jeevan Mission (whose expenditure is projected to grow by 27 per cent), an unrealistically small increase has been allowed for all other major schemes like the Mahatma Gandhi National Rural Employment Guarantee Programme, Pradhan Mantri Awas Yojna and Pradhan Mantri Kisan Samman. This can go wrong. Similarly, the expenditure on major subsidies is projected to decline by 80 per cent to Rs 3.75 trillion, relying on lower international fertiliser prices and the end of the free food scheme under the public distribution system by the end of December 2023. Any of these assumptions could go wrong and the revenue expenditure under these heads could be higher than what has been budgeted.

Ms Sitharaman’s fifth Budget would stand out for three other initiatives. One, the launch of a new revamped exemptions-free income-tax regime for individuals could help streamline the personal income-tax system, riddled as it is with hundreds of exemptions through several savings and investment schemes. If the new tax regime makes headway, it would be a major gain for the government. Note that the finance minister’s tax collection numbers under personal income-tax do not seem to suggest that there is going to be any major revenue loss. Thus, it is possible that an alternative tax regime for individuals, without exemptions, could be in place without any major hit to the exchequer.

Two, the tax benefit extended to income-tax payers at the highest slab would mean a reduction in their tax rate from 42.7 per cent to 39 per cent. But it is important to note that the entire revenue loss as a result of this move would be borne by the Centre, since the benefit is being given through a reduction in the tax surcharge from 37 per cent to 25 per cent. The states should have no reason to complain about this tax relief, just as they should welcome the increase in the allocation of capital expenditure outlay for them from Rs 1 trillion in 2022-23 to Rs 1.3 trillion in 2023-24.

Finally, the Customs duty package is a mix of tariff changes on a wide range of goods, but the overall rhetoric of providing a level playing field through such decisions was missing in this Budget. Indeed, the reduction in the number of Customs duty rates from 21 to 13 was a move towards streamlining and simplification. Some increases in the Customs duty were aimed at encouraging domestic value addition and rectifying inversions, but many items used by mobile phone makers and marine product exporters saw the duty go down.

In the end, would Ms Sitharaman’s Budget be described as a pre-election exercise? The income-tax relief for the high-income earners and the alternative tax regime have certainly created a feel-good factor among the middle class. However, even while providing such reliefs, the finance minister has stayed true to her commitment to fiscal consolidation, even though the pace of the decline in the deficit could have been faster.