Programme names can be changed or combined, or new schemes with low
outlays announced, to create the necessary optics.
Elections and budgets elicit the same amount of media attention, often
even public interest. The difference, however, is that while the former take
place every five years, the budget is an annual affair and sees repeated
debates. Now that the Union budget of 1 February will be the last one before
general elections in 2024, discussions are around whether populism will
dominate its proceedings.
What should be remembered is that the government is responsible for and
has committed itself to a path of fiscal prudence by which its budget deficit
will reduce to reach 4.5% of gross domestic product (GDP) by 2025-26.
Considering that the deficit was budgeted at 6.4% for 2022-23, it stands to
reason that there will be a staggered reduction of around 0.5-0.75% of GDP in
the next three years. Therefore, any conjecture on what the government will
announce would be within this perimeter.
It must be reiterated that budgets can never be precise because they are
based on assumptions of growth which can never be gauged with full accuracy
before the year begins. Hence invariably, fine-tuning of expenditures is
required, which then becomes the fulcrum.
That said, expenditure outlays always generate primary interest. Here,
interestingly, a large part is what can be called committed expenditure, or
expenses that have to be incurred whether or not one likes it. Interest
payments and pensions are items which cannot be cut and only tend to increase.
Our defence outlay will probably increase in line with India’s ongoing border
issues. Subsidies are necessary and the challenge is to roll-back what was
provided as contingency in the last few years. Covid and the war in Ukraine had
necessitated higher outlays that are not required now. This would be one of the
challenges this time round. The budget for 2022-23 had allocated almost half
its total outlay of ₹39.44 trillion for these purposes.
After meeting these fixed commitments, there are allocations to be made
for other essentials like health, education and administration. Add to this
transfers to states as grants for implementing centrally-sponsored schemes, and
there is not much flexibility left. There are overhangs in the form of the
PM-Kisan scheme, under which cash transfers were given to farmers, as well as
the NREGA programme, whose outlay had to be upped from the ₹73,000 crore
initially budgeted. Therefore, once the fiscal deficit level has been fixed,
there is little room for bringing in any big-bang programme that involves a
significant outlay. The production linked incentive scheme’s outlay can be
increased, and will probably be done, but will turn into a big expense only
when industry meets large targets. There can, hence, be some tweaking of numbers,
and the priority will be on increasing capital expenditure to the extent
feasible. The 2022-23 outlay was ₹6.5 trillion
(excluding a ₹1 trillion transfer to states), which
can be increased by not more than 10-15%.
The secondary part of the story is revenue. The fiscal deficit ratio
will be defined by the GDP growth assumed, and it looks like 11-12% would be
it. This will shape other assumptions made on line items, which get linked to
the absolute nominal GDP figure of ₹305 trillion. Next
year, two handicaps will be a lower real GDP growth number of 6-6.5% and lower
inflation of 5.5%. The bounty of 2022-23 in India’s GST mop-up as well as
corporate tax will not be replicated in 2023-24. Lower global commodity prices
will also come in the way of customs collections. Hence, there is little space
on the revenue front. If at all some populism has to be brought in, the
government could consider lowering excise on fuels, probably in the beginning
of 2024, to placate the electorate. Or oil marketing companies may be asked to
trim their profits with crude remaining stable in global markets.
On the non-tax front, there would be some conundrums. The disinvestment
target has not been met for several years and a more realistic number could be
around ₹40,000 crore. Further, a surplus from
the banking system will be hard to count on this time. The Reserve Bank of
India (RBI) may not be able to transfer a larger amount, given that systemic
liquidity was in surplus this year and RBI made higher interest payments to
banks. Unless adjustments are made in the reserves to transfer funds, this part
would require some working.
Markets would be interested in government borrowings, which New Delhi
may keep within range so as to not spook rates as liquidity is already tight.
Greater recourse to the National Social Security fund looks likely, to ensure
that net market borrowings as a proportion of the fiscal deficit stays at
around 67-70%.
All this means that while there will be several discussions on
trade-offs and populist measures that will form the core of the budget,
practically speaking, nothing significantly different is likely to materialize.
Programme names can be changed or combined, or new schemes with low outlays
announced, to create the necessary optics. There will be the standard
achievements of the year laid out with some innovative acronyms for thrust
areas in 2023-24. A target for farm credit is a necessity, while there could be
a new theme taken up, like logistics was last year. It will be a prudent
statement, with public money well spent. This we can reasonably expect and that
is what matters at the end of the day.
Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Lockdown or Economic Destruction?’
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