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UPSC EDITORIAL ANALYSIS – A Budget that drives growth with stability     

 

Source: The Hindu

  • Prelims: Indian Economy(GDP, GVA, fiscal policy, budget, FRBM, gross fixed capital formation (GFCF), economic survey, budget, Employment etc )
  • Mains GS Paper III: Fiscal policy, Monetary policy, GDP, Issues related to planning etc.

ARTICLE HIGHLIGHTS

  • The Union Budget (2024-25) will be presented by the Finance Minister in the Lok Sabha on July 23.
  • The President of India, on the recommendation of the Government has approved the proposal for summoning of both the Houses of Parliament for the Budget Session, 2024.

 

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.

 

Objectives:

  • Short term: Ensure a minimum 7% growth
    • Medium-term objective is to sustain the real GDP growth rate in the range of 7%-7.5%.
  • Bringing down the fiscal deficit relative to GDP from the current levels to the Fiscal Responsibility and Budget Management (FRBM) consistent level of 3% in the next three to four years.
  • Employment objective along with additional emphasis on the relatively more labor-intensive sectors in the composition of output.

 

Investment and savings prospects

●      To ensure a 7% plus growth on a sustained basis, a real investment rate of 35%.

●      Latest data(2023-24): The real investment rate measured as gross fixed capital formation (GFCF), as percentage of GDP, was 33.3 for 2022-23 and 33.5 for 2023-24.

○      Gross capital formation (GCF) is marginally higher

○      Ensure a level of GFCF at 35% or so in the medium-term to sustain a growth of 7% plus

●      The saving to GDP ratio in nominal and real terms were 30.2% and 32.8%, respectively, in 2022-23.

○      Marginal upward adjustments are required in the savings and investment rates to ensure reaching and sustaining a level of 35% of GDP for the GFCF.

●      Fall in household sector financial savings(2022-23) had fallen to 5.2% of Gross National Disposable Income.

○      It is critical to increase the household financial savings rate to facilitate access to investible surplus at reasonable rates for the private sector.

●      The contribution of net exports to GDP growth has remained negative or low in recent years due to subdued export prospects.

○      It was at 0.5% points in 2022-23 and (-)2.0% points in 2023-24.

●      Indian service exports are expected to continue to do better than goods exports, which contracted in 2023-24.

○      India will have to rely on government investment demand to provide support to growth.

  • Until Export demand should picks up and private investment gathers momentum

 

Budgetary options:

●      Controller General of Accounts (CGA): The base number for gross tax revenues (GTR) for 2023-24 at ₹34.65 lakh crore, actuals turned out to be higher than the revised estimates (RE) of the interim Budget by a margin of ₹27,581 crore.

●      A nominal GDP growth for 2024-25 to be at least 11%, made up of 7% real growth and 3.8% implicit price deflator (IPD)-based inflation.

●      The rise in the IPD-based inflation as compared to the 2023-24 level of 1.3%: It is on account of expected higher Wholesale Price Index (WPI) inflation which was (-)0.7% in 2023-24.

●      Buoyancy of 1.1 and a GTR growth of 12.1%, expect a GTR magnitude of ₹38.8 lakh crore.

○      Net tax revenue for the Centre at ₹26.4 lakh crore after providing for States’ share in central taxes

○      Higher than ₹26 lakh crore provided in the interim Budget.

  • Non-tax revenues are expected to be higher, as compared to the interim Budget estimates
    • Due to (RBI)’s augmented dividends of ₹2.11 lakh crore.
    • Centre’s non-tax revenues to exceed ₹5 lakh crore.
    • Any transfer from the RBI is going to be expansionary since it will have a liquidity effect.
  • With the interim Budget expenditure magnitudes, revenue expenditure growth in 2024-25 turns out to be 6% over the CGA actuals for 2023-24.
    • This growth may have to be increased to accommodate higher revenue expenditures on account of
      • Increased subsidies
      • Increased health expenditures
      • Increased allocations for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).

Way Forward

  • Even if the revenue expenditure growth is enhanced to 8%, this would provide additional revenue expenditures close to ₹3 lakh crore over 2023-24 actuals.
    • This would leave fiscal space to provide for capital expenditure growth of 2% in 2024-25
    • It would be required for supporting investment demand resulting in infrastructure expansion that is consistent with the government’s medium-term objectives.
  • Tax rationalisation measures may be undertaken as long as they do not imply any significant revenue sacrifice.
  • Expansion of the ongoing Production Linked Incentive (PLI) scheme, particularly if it supports employment generation, may be considered.
  • The Budget needs to aim at combining growth with stability.
    • Stability includes both price stability and fiscal stability.
  • Signal commitment to the FRBM targets in the short to medium term.
  • As the fiscal deficit to GDP ratio is reduced and nominal GDP growth is kept in the range of 11%-11.5%
    • The debt GDP ratio and the interest payment to revenue receipts ratio would also come down, facilitating the reduction in fiscal deficit, thereby creating a virtuous cycle.

QUESTION FOR PRACTICE

  1. Explain intergenerational and intragenerational issues of equity from the perspective of inclusive growth and sustainable growth.(UPSC 2020)

(200 WORDS, 10 MARKS)

Editorial Analysis – 10 July 2024 [PDF]