Budget in the time of fiscal stress
The Union Budget for 2023-24 coming up next week will be the fourth budget for NDA II. The budget will be presented against the backdrop of weak private investment sentiment posing a threat to a high level of potential growth, elevated levels of inflation measured in terms of CPI-Combined, persistent 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. These global developments will pose a threat of spill-overs to Indian economic development in terms of weak external demand and imported inflation.
The focus of the budget should be to further continue higher provisions in infrastructure investment ensuring that the budget is an instrument to enhance growth because of higher fiscal multipliers for capital expenditure
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 the Fiscal Consolidation in terms of provisions enacted in the FRBM Act. The fiscal deficit swelled to 9.2% of GDP in 2020-21, twice the magnitude recorded in 2019-20. Thereafter, the government’s efforts were to reduce it to 6.9% and 6.4% 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% over the revised estimates of 2021-22. This was intended to boost economic growth as private investment is not picking up and is irresponsive to lower interest rates. Thus, the three years of the pandemic have resulted in a cumulative increase in the fiscal deficit of 22.5% of the GDP and bolstering the debt to GDP ratio to around 69%. This is way above the FRBM target of 40%.
The pandemic has put unprecedented fiscal stress and left no scope for any quick return back to fiscal consolidation as enacted in the FRBM Act
It is true that the pandemic brought us a higher level of deficit and debt as mentioned above. However, looking back, the fiscal situation in terms of the fiscal deficit to GDP ratio remained higher than the FRBM target of 3%. During the period 2011-12 to 2019-20, it was in the range of 3.4% and 5.9%, 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% in 2024-25 - a correction of 1.9% over a period of two years or a correction of 0.9% on an average during this period (2023-25). Thus, in an aggregate sense, taking into account the average correction of 0.9% of the GDP, the budget for 2023-24 could have a projected fiscal deficit of 5.5% relative to GDP.
Mobilise larger amounts of non-debt resources by enhancing tax buoyancy through simplified and improved compliances
In the above context, it is important to project the revised estimates for 2022-23. Currently we have the actual data for the period April-November 2022 published by the Controller General of Accounts Government of India. The broad picture emerging out of the fiscal position for April-November is enumerated as follows: a) higher provision of capital expenditure (59.6% of the budget estimates as against 49.4% in corresponding period of previous year) b) slowdown in tax revenue(63.3% of the budget estimates as against 73.5% in corresponding period of previous year) and non-tax revenue (73.5% of the budget estimates as against 91.8% in corresponding period of previous year), leading to a slowdown in revenue receipts (64.6% of the budget estimates as against 75.9% in corresponding period of previous year). c) Higher realisation of non-debt capital receipts (52.3% of the budget estimates as against 11.0% 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% of the budget estimates as against 46.2% in the corresponding period of previous year).
Now let us turn to the scope for fiscal correction while presenting 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.
Prioritise expenditure towards key developmental sectors viz., health, education, drinking water and sanitation, agriculture, rural development etc. to boost sustainable growth and employment
Looking at the sources of financing the deficit during the period April-November 2022, external financing has been in the order of 78% of the total budget estimates and domestic borrowings accounted for 59% as against 46% in the corresponding period of previous year. The government has already mobilised 76% of the total market borrowing during April-November 2022 as against 56% during the corresponding period of the previous year. It is pertinent to note that the Union Budget 2022-23 has not made any provision for the National Small Savings Fund (NSSF). However, the government has received Rs. 91,894.7 crore in respect of NSSF. Therefore, to that extent, the market borrowings of the government will get reduced in the event of higher NSSF during the remaining period of four months. Thus, on both counts, the revenue & expenditure front, and financing front, it looks like there is no scope for any large-scale fiscal correction.
Having discussed the constraint of fiscal consolidation and correction, we now turn to various options before the government in terms of our suggestions. First, the focus of the budget should be to further continue higher provisions in infrastructure investment ensuring that the budget is an instrument to enhance growth because of higher fiscal multipliers for capital expenditure. Theoretically, investing in capital expenditure tends to have a higher multiplier effect on economic recovery. In India, the multiplier effect of capital expenditure made by the Central Government 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).
Secondly, the budget will have higher provisions for disinvestments for reduction in the fiscal deficit going by the trend of 2022-23 in this context. Thirdly, the budget should support the MSME sector as this sector has been instrumental in enhancing manufacturing production, employment and export. In addition to the continued support to MSME through delivery of credit and delivery of subsidies, the budget should have an institutional arrangement for skill development for entrepreneurs in this sector. Fourth, 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 Government of India announced a new integrated food security scheme, allowing provisions of free food grains (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 food grains 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 back 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 are personal)