EDITORIAL ANALYSIS : A Budget that signals growth with stability

Source: The Hindu

Directions: Continuation of article: The Economic Survey that wasn’t

• Prelims: Indian Economy(GDP, GVA, fiscal policy, budget, economic survey, budget, GST etc)
• Mains GS Paper III: Fiscal policy, Monetary policy, GDP, Issues related to planning etc.

ARTICLE HIGHLIGHTS

• The Economic Survey presented before the Budget for 2023-24 has laid emphasis that India has staged a remarkable broad-based recovery to reach the level of income that existed before the pandemic.

INSIGHTS ON THE ISSUE

Context

Budget:

• The government’s blueprint on:
  • expenditure
  • taxes it plans to levy
  • other transactions which affect the economy and lives of citizens.
• Article 112 of the Indian Constitution: Union Budget of a year is referred to as the Annual Financial Statement (AFS).
• The Budget Division of the Department of Economic Affairs in the Finance Ministry is the nodal body responsible for preparing the Budget.
• Components of the Budget:
  • expenditure
  • receipts
  • deficit indicators.
• Depending on the manner in which they are defined, there can be many classifications and indicators of expenditure, receipts and deficits.

Challenges that world faced:

• Pandemic
• War between Russia and Ukraine
• Sanctions imposed by the West on Russia
• Slowdown and the recession in major parts of the world
• Rise in inflation leading to sharp increases in interest rates
• Capital outflow and the pressure on the exchange rate.

Present economic challenges:

• Economy is still 7% below the pre-pandemic GDP trend
• Growth has to be fuelled by increasing public investment.
• Inflation still beyond the upper tolerance limit
• Aggregate fiscal deficit (Centre and States) still in the range of 9% to 10% of GDP
• The government is faced with the dilemma of accelerating growth by increasing public investment while containing the fiscal deficit.
• Interest payments accounting for 40% of the net revenues of the Centre, very less room for complacency.

What are the positives in budget?

• Keeping the fiscal deficit limited to 6.4(six point four)% of GDP in the current fiscal despite a sharp increase in food and fertilizer subsidies, by ₹2 lakh crore.
• Despite the revenue deficit increasing in absolute terms, from ₹9.9(nine point nine)lakh crore in the Budget estimate to ₹11.1(eleven point one) lakh crore in the revised estimate
  • As a percentage of GDP, it was from 3.8(three point eight)% of GDP to 4.1(four point one)%.
• Case of fiscal deficit:The increase was by ₹1 lakh crore — from ₹16.6(sixteen point six) lakh crore to ₹17.6(seventeen point six)lakh crore, but it was contained at 4(six point four)% of GDP mainly due to the increase in the nominal value of GDP and also the increase in tax collections.
• Greater allocation to infrastructure spending

Capital expenditure:

• It is budgeted to increase from 7(two point seven)% of GDP to 3.3(three point three)%.
• The Reserve Bank of India has estimations:the multiplier effect of capital expenditure at 1.2(one point two).
  • It should help revive the sagging investment climate.
• The continuation of the interest-free loan to States to augment their capital expenditures should help in increasing States’ capital expenditures as well.
• The 6.5(six point five)% growth rate for 2023-24 estimated in the Economic Survey: It could indeed materialize with the budgeted increase in infrastructure spending.

Key highlights in budget:

• The fiscal adjustment is proposed to be achieved by mainly containing revenue expenditure
• The budgeted increase in revenue expenditures for 2023-24 is just 2(one point two)% higher than the revised estimate for the current year.
• Significant compression in subsidies.
  • The food subsidy is expected to be reduced from ₹2.87(two point eight seven)lakh crore to ₹1.97(one point nine seven)lakh crore
  • The fertilizer subsidy is budgeted to be reduced from ₹2.25(two point two five)lakh crore in 2022-23 (RE) to ₹1.75(one point seven five)lakh crore in 2023-24 (BE).
• Foodgrains given under the National Food Securities Act have been discontinued.
• Allocation to centrally sponsored schemes is expected to come down marginally by about ₹20,000 crore
• Overall current transfer to States is kept constant at 3(three point three)%-3.4(three point four)% of GDP.
• On the tax side: there is some tinkering of customs duty, and the overall protectionist stance has continued.
• On the personal income tax front: attempt has been to incentivise taxpayers to move to the new tax regime with no concessions and lower rates.

Way Forward

• Capital expenditure has a significant ‘crowding in’ effect: It should help to increase private capital expenditures as well.
  • This comes after the 25% increase in capital expenditures in the last Budget.
• The increased capital spending should help revive the investment climate further and arrest the declining trend in the overall investment-GDP ratio in the country.
• The Finance Minister in the 2020-21 Budget had stated that the government would bring down the fiscal deficit to 4.5(four point five)% by 2025-26.
  • In the next three years, the deficit will have to be reduced by 9(one point nine)percentage points.
• Overall this is a well-crafted Budget, but its success will depend on its implementation.

QUESTION FOR PRACTICE

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.(UPSC 2019) (200 WORDS, 10 MARKS)