Will the government fall prey to electoral temptations or will it remain focused on growth and fiscal consolidation?
The last full year Union Budget, as well as the State Budgets that preceded the General and Legislative Assembly elections, were understandably populist in character and content. When translated into financial and policy decisions, this meant promising goods and services at below cost, or in some cases totally free. Concessions of various kinds also get extended to the applicable regulatory provisions. Obviously, the expectations of all governments of the day is to convert such “revadis” (as these have come to be called ever since Prime Minister Narendra Modi termed them so a few months ago) into immediate political and voting support. In such a somewhat reciprocal process, the authorities tend to forsake the potential leverage available to them by not using budgetary financial provisions for larger and sustained public welfare that might require a long gestation period before bearing fruits.
When presenting its budget for 2023-24, the million-dollar question now is whether the currently well entrenched NDA government at the Centre would fall prey to these electoral temptations or would it remain focused on growth and fiscal consolidation. A reasonable expectation is that Union Finance Minister Nirmala Sitharaman, now presenting her fifth Budget, would maintain a nuanced approach and aim for a blend of both.
CONSTRAINTS IN BUDGET-MAKING
While settling on the sections of society and regions of the country to be favoured in the Union Budget, the NDA Government would have to reckon with certain significant constraints. The unfavourable international geo-political situation and the adverse global economic prognosis for the next couple of years would continue to have its impact on the budgetary exercise. The resultant high levels of the import bills of essentials like crude oil and fertilizers, and the subsidies extended to food, shall continue to hugely burden the exchequer. Alongside a global economic slowdown and a possible recession in the developed world, there will invariably be a slowdown of some Indian economic macros, viz GDP, levels of external trade, inflow of foreign capital, and both FDI and FII. The global supply chain disruptions of critical components and products are still affecting the levels of industrial production and their prices. Consequently, Indian private investors remain reticent about making investments and creating additional capacities by way of green field projects.
Apart from global factors, there are the long prevalent domestic factors at play. The interest payments due on the past loans by the Union Government stand out, given they are commonly as large as 50% of the total tax revenues. When the payments of salaries and pensions of government staff are added to it, the two together usually account for two-thirds of revenue. Besides this are the huge expenditures to be necessarily incurred on defence, education, health and social security. A good part of the higher accruals from the tax collections are transferable to the state governments as per the Finance Commission awards, with only a limited portion of the increased collections remaining with the Union. In effect, the discretionary funds available to the Finance Minister to appropriate to different causes, have commonly been only about 15% of the Union Budget.
There is also the need to be cognizant of the issue of maintaining fiscal health. The present Union Government has repeatedly reiterated that it would remain within the fiscal deficit target of 6.4% of GDP in the current year. With its higher than-than-expected tax revenues, and the high nominal GDP growth during the year, such adherence should be feasible. However, as GDP growth slows down, which is expected in 2023-24, lowering the fiscal deficit significantly would be challenging. That does not augur well for the set goal of reducing the fiscal deficit below 4.5% by 2025-26. Succumbing to any electoral temptation to grant additional “freebies” in the next two or three years’ Budgets, would only make for breaching of the fiscal deficit ceilings and give rise to domestically induced inflation.
Yet another “must” in the forthcoming budget is to keep pushing capital expenditure, in light of the deficiency caused by the prolonged delay in reviving private investment. Balancing this priority, without upsetting the process of fiscal consolidation, would require unusual ingenuity in raising funds. The flip side is that due care would need to be taken to ensure that incurring sustained high deficit financing does not reduce the space available to raise finances for private investment. Otherwise, it would be a zero sum game with no macro benefit.
Finally, in raising the finances for a larger sized budget, a proclivity to be checked would be to raise the level of import duties. With much political determination and fiscal risk over the years, the average Indian import duties had come fairly close to the ASEAN levels. However, to give a fillip to the Aatmanirbharta (self-dependence) mission, the process has been somewhat reversed in recent years. Desirable as it might be deemed, particularly in defence, food and health care, the overall import duties need to be kept low. There is an added degree of urgency here as several large global corporates are currently in the process of relocating manufacturing operations away from China to competitively placed geographies. The new emerging multi-national supply chains also are likely to embrace only those nations where duties are close to nil and do not distort the cost based considerations in foreign trade.
SECTIONS AND SEGMENTS LIKELY TO BE FAVOURED
* Agriculture & Farmers: Given its preponderance and criticality, agriculture—in several of its facets—is likely to be further assisted. This stands to reason, as over the years, the terms of trade vis-a-vis other sectors of the economy, have been going against it. Despite there being valid arguments against continuing it and gradually raising the MSP of cereals like wheat and paddy, the past increases would be maintained. That converts into making higher provisions for the Public Distribution System (PDS) implemented through the Food Corporation of India, and the PM Garib Kalyan Ann Yojana (PMGKAY), now implemented under the National Food Security Act. The latter scheme, in fact, was recently extended for the next full financial year instead of the earlier practice of extending it quarterly.
There are no signs of the huge subsidy being given on the retail sale of chemical fertilizers getting rationalized in any manner. Farmers, both the bigger land holders and the marginal ones, have got used to buying NPK and other nutrients at rates of over a decade ago. Due to the ongoing war in Ukraine, the Indian import bill of fertilisers had doubled and the annual provisions for fertilizer-subsidy stepped up to a staggering Rs 2.5 trillion, from the original Rs 1.06 trillion. Though of late there has been some softening of global soil nutrients’ prices, the subsidy bill is projected to remain about Rs 2 trillion. Irrespective of the high level of imports of fertilizers viz 50% of DAP and MOP, and 25% of urea’s domestic requirement along with the Rupee depreciating against the US dollar, farmers’ own spend on fertilizers remains meagre. For urea, they pay a fixed price of Rs 242 per bag of 45 kg against a production cost of Rs 2,650 per bag (on the other nutrients, a fixed subsidy is given).
Livestock rearing: Also on the cards could be a universal livestock insurance scheme. At present, cross bred and high-yielding cattle are insured at the maximum of their current market price, with the premium subsidized at 50% by central government The new Scheme covering all indigenous cattle including yaks and mithuns could be on the lines of the Pradhan Mantri Fasal Bima Yojana for agricultural produce. Under it, the maximum premium payable by farmers is 1.5% of the sum assured for Kharif, and 2% for winter crops.
* Rural Employment: Evidence is available that rural real wages have not increased in recent years, and in fact, might have declined in several regions. That calls for the outlays on MGNREGS, the national rural employment guarantee scheme, being enhanced up front. Hitherto, to balance the budget, the original provisions were kept lower than the anticipated expenditure, and enhanced subsequently during the year. Such uncertainty often led the state governments who implement it to cut back their expenses by reducing the number of assured days of employment per household, as well as hold back the wages of workers. In the current year, reportedly till end December 2022, the average employment provided was a meagre 42 days per household; lower than in previous years. To quell the potential emerging dissatisfaction, the Union Government is expected to make a much-needed course correction. In a similar vein, the PM Rural Awas Yojana, or the house construction scheme, which has gradually been expanded in scope and spending, could do with better funding.
* Manufacturing Through PLI: Enthused by the outcome of operating the recently launched Production Linked Investment Scheme to boost manufacturing, exports and technology, it is reasonable to anticipate that this measure would be augmented. Hitherto, 14 specific segments had been covered; these are likely to be expanded by another 6 or 7 and the outlays accordingly enhanced. The likely candidate -industries are shipping container fabrication ,toy- making, intermediate chemicals, specialty steel besides labour intensive textiles ,apparel and leather. With their extensive forward and backward linkages, the multiplier effects on import -substitution, employment generation and promoting the Make in India mission can be substantial. Last year, the provision was Rs 1.97 lakh crores (and the investment committed Rs 2.34 lakh crores) which could be raised by about Rs 50,000 crores.
* Infrastructure Push through Highways and Railways: With the macroeconomic rationale of pushing capital formation persisting, the likely beneficiaries in a capex hike in the Budget from last year’s Rs 7.5 trillion could be Defence, Highways and Railways. After a long gap, Indian Railways’ operating ratio and revenues are expected to be better than budgeted, largely due to higher passenger-earnings. There is optimism linked to the program of hastening the speed of passenger trains through the locally assembled Vande Mataram trains, and the indigenous manufacturing of locomotives, coaches and rail tracks. Associating private players in the expansion and modernization of the rail network is now being realistically recast. The near doubling of route length in the next 8 to 10 years for once looks doable. Pleased with the performance of the recently appointed technocrat-bureaucrat Rail Minister, the Prime Minister as well as the Finance Minister, are likely to accede to his request for a 30% higher budgetary support of Rs 2 trillion.
* Logistics: There is greater appreciation now that the competitiveness of Indian goods and services can be improved if the overall logistics costs, reportedly at 14% of GDP at present, are reduced below 10%. This segment covering highways, ports, multi modal transportation, container terminals, warehousing is amenable to a high degree to digitalization, as well as large scale expansion through private participation by way of investments and subsequent operation. All such measures result in supply chain efficiency and rapid e-commerce growth. The Gati Shakti program aimed at filling up the connectivity gaps and digitally monitoring all the constituents has hitherto produced encouraging results. The expected government capex boost to this sector could be significant and thereby raise the annual overall investment to 3% of GDP from 2.2% in 2020-21.
* The Middle Class: It remains to be seen whether the long on-going clamour of the income tax payers at the lower and middle rungs to have a higher exemption limit and more rate slabs, will be acted upon. No doubt, there has been no revisions in these after 2014, despite several years of high inflation. That does make a case for relief to the salaried and marginal tax players, particularly as the corporate sector had seen its tax rates being significantly cut down to 15% in 2019. The consideration of growing the aggregate demand in the economy (thereby improving capacity-utilization and inducing private investment) also favours their plea. Lowering their tax-incidence should not have an adverse effect on the overall tax collections.
Post the recent pandemic, the government is likely to pay greater attention to basic health care, primary education and other essentials for the common man. Towards that, the Ayushman Bharat health scheme might see its expansion and better provisioning. As would be the efforts at improving school education. The two and half years long disruption has impacted the process of basic education and the growth in children’s abilities to read and write. Strengthening the capacities of the state governments to make amends in this direction calls for intervention by the better endowed central government.
Evidently, there are avenues and opportunities available to the budget-makers to rationally allocate the scarce public funds without compromising on electoral considerations. This is also feasible without compromising on future growth prospects and keeping in mind the goal of fiscal consolidation. Keeping in view next year’s general elections and the impending electoral contests in 9 states, fiscal stability and progress can still be adhered to. There is little reason to doubt that the current leadership in union government is not aware of this aspect, or would deviate much from it.
Dr Ajay Dua, a development economist by training, is a former Union Secretary.