Budget Bounties 2023-24

Our garden is full of goodies come and get what you need. This is what Finance Minister Sitharaman conveyed to the people (and voters) of India in her 2023-24 budget speech. Adding to the ever deepening gift bag that the Modi administration has held out to voters since 2015, the budget not only slashed income tax rates across the income spectrum – seeking to leave more income in the hands of the well-off and the middle-class income tax payer- but also unleashed the largest ever capital outlay by the Union government amounting to just above 4 percent of GDP- a growth of 30 percent over the capital outlay this fiscal, versus a 10 percent increase in the nominal GDP next fiscal.

Loosening fiscal resolve

Combine this with the fact that fiscal deficit is slated to reduce to 5.9 percent of GDP next fiscal versus 6.4 percent this fiscal, and one begins to wonder if the data adds up. The catch is that revenue expenditure is near stagnant next fiscal, even though the interest burden which comprises 31 percent of revenue expenditure, is slated to increase by 14.8 percent. Add to than inflation at a minimum of 5.5 percent next fiscal and it becomes clear the revenue expenditure is severely understated for next fiscal. The bottom line is that either the fiscal deficit target will be missed next year, or the capital expenditure will undershoot the budgeted amount.

The FM received kudos, at the commencement of her term, for taking a stand against massaging budget numbers in a non- transparent manner. That resolve appears to have weakened in the hurly burly of electoral politics. One can only hope that the budgetary inconsistency is not as substantial as in the UK recently, which resulted in an adverse market reaction. Market orientation in fiscal affairs is critical since market borrowing are projected at a never before Rs 12.3 trillion or 3.9 percent of GDP.

The FM projected in 2020-21 a phased reduction in the fiscal deficit to below 4.5 percent of GDP in 2025-26. Making the transition from a presently unsustainable to a more sustainable fiscal deficit would be difficult even if the FD targeted for FY 2023-24 of 5.9 percent is achieved. That would still leave a required reduction in FD of more than 1.40 percentage points or more than 70 basis points in each year. This implies that the pain of adjustment has been deferred till after the general elections in May 2024.

If growth accelerates above 7.5 percent a transition to fiscal stability might still be possible. However, assuming anything but moderate growth (6 to 6.5 percent) is risky. As things stand – though a year in electoral politics is a long time- the Modi administration is well placed to win at the hustings in 2024. The strategy adopted of kicking the fiscal adjustment can down the road will come back to bite it in future, at best, and at worst, undermine stability if global conditions deteriorate.

Infrastructure allocation on shaky grounds

With fiscal deficit for states pegged at 3.5 percent of GDP during the next fiscal and continuance of the Union government scheme for interest free, fifty-year loans to state governments for expanding their capital budgets, government spending on infrastructure is set to explode. To be sure this is no knee jerk reaction. The Infrastructure Investment Pipeline targeted Rs 111 trillion, over the period 2020 to 2025 – an average outlay of Rs 20 trillion every year, from a mix of resources including multilateral loans and private investment. Government is playing to that target by proposing around 40 percent of that amount from the Union government and by facilitating state governments to pull their weight.

Big government still in play

In time of capital scarcity, efficient allocation of capital becomes critical. Why for instance is government continuing down the “big government” model of growing the public sector instead of downsizing it or restructuring it, into joint sector arrangements with government holding only a minority share? The much-vaunted Monetization Pipeline is yet to show results. Under the head “Other Capital Receipts” the target for next fiscal is near stagnant at Rs 0.6 trillion from disinvestment.

Capital allocations for the public sector are on the increase. Indian Railways intends to earn just Rs 2.62 trillion from revenues (Receipts Budget) next fiscal. But its revenue allocation from the budget is Rs 3.31 trillion (Demand for grants) showing a negative earning on commercial operations. In addition, Rs 4.41 trillion will be allocated to it for capital investment. Undoubtedly Indian Railway is the only long-distance link available, at reasonable cost, to the average citizen for traversing a continent sized India. But even Goliaths need to become commercially viable by rationalizing services, tariff and management systems. The current trend is to just pump in more resources to increase “branded” services without resolving the underlying inefficiency in capital use.

Rationalizing fiscal outlays

In the early days of the Modi administration there was a concern with the proliferation schemes in the Union budget. These seem to have multiplied. 185 major schemes are listed for budget allocation of major outlays including Rs 0.3 trillion as capital support to oil marketing companies. Why is it not feasible for these companies to access capital on the strength of their balance sheet like any other listed company?

The classification of schemes into Core of Core (6 schemes), Core (32 schemes) and Major Central Schemes (147 schemes) has become jaded by haphazard inclusion of schemes under these three heads. Consider that the largest “Core scheme” is the MGNREP with an allocation of Rs 0.6 trillion – a scheme which has stood the test of time as the fastest and last recourse for self-selecting income support, through manual employment, in rural areas. The five other schemes in this category are minnows. Sadly, even MNREGA is outgunned by major Core Scheme. The Jal Jeevan Mission with an outlay of Rs 0.7 trillion and PM Awas Yojana with an outlay of 0.8 trillion are Goliaths with 30 other mid-sized schemes and minnows.

Under the Central Sector Schemes the PM Kisan Samman Yojana (direct transfer of benefits to farmers) with an outlay of Rs 0.6 trillion, the Urea Subsidy scheme -outlay Rs 1.31 trillion, Nutrient Based Subsidy outlay Rs 0.4 trillion, the Food Subsidy Scheme (FCI), outlay Rs 1.37 trillion, the Food decentralized procurement scheme (FCI) outlay Rs 0.6 trillion are Goliaths mixed up  with 147 minnows and mid-sized schemes. Could these schemes not be clubbed or amended rather than pancaked, as they are today, as new priorities emerge. How sticky do these outlays get and how many have outlived their original purpose?

How does a strategy of “sprinkling resources” across a large and ever-growing set of “priorities” align with the ground reality of potentially recessionary conditions globally, strained fiscal balance and a widening current account deficit at home?

Four factors seem to strengthen the Finance Ministers assumption that recession, even if it takes hold in the advanced economies, will bypass India.  First, India never enlarged liquidity to the extent that the advanced economies did to safeguard domestic income. India passed through the pain of the covid-19 induced unemployment and slow-down and hardening interest rates to consumers, who took the blow on the chin though price rise in food, fuel and fertilizers. The provision of free food to 800 million consumers and lower tax rates on petroleum fuels contained the price rise.

Second, inflation is moderating. The Consumer Price Index is already within the outside tolerable limit of 6 percent and the Reserve Bank of India expects it to moderate down to 5 percent next fiscal. The Wholesale Price Index is similarly moderating downwards so expectations of an early return to stability are not unreasonable.

In adversity we flourish

Third, Union government revenue has been buoyant growing at 12.3 percent over the previous fiscal versus GDP growth of 10 percent. Fourth the Chief Economic Adviser asserts, with justification, that a global slowdown is likely to be more beneficial than a strong revival fueled by the fast opening up of China. The latter will raise the price of imported commodities which can spark domestic inflation. Enhanced competition in export markets can hurt India by diverting the recent, enhanced foreign investment sentiment, back to traditional supply chains out of China and East Asia. This, otherwise morbid reasoning, deserves careful consideration.

The bottom line is that we have been lucky that geopolitical realignments and deft footwork by our diplomats, have put India in a favorable position, versus the rest of the world, in navigating the presently choppy global waters. But caution is advised in lapsing into the hubris of assuming that this advantage is permanent. More importantly, an excess of easy money, never did any economy or business, any good. We must continue to improve our capital budgeting systems and fiscal forecast models, to ensure government uses each rupee, as carefully and wisely, as do the citizens of India.

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