The macro-fiscal question

Budget reflects the limitations of a fiscally-strapped government. Increases in capital outlays have matched decreases in public sector capex

From a macro-fiscal perspective, this Budget is the best since Arun Jaitley’s gold-plated 2016 Budget, once one factors in the weak execution capabilities of the finance ministry, as I have been forced to do over the years. The key constraints that cause macro-fiscal stress have not been tackled, but they have been managed quite capably, much better than previous years. 

For all the intra-year bluster, the gross tax revenue to gross domestic product ratio is 11.14 per cent in FY23. This is lower than the targets set in FY19 and FY20, the moderation reflecting an acknowledgement that the government’s ability to raise tax revenue is severely limited. The target for FY24 remains the same, reflecting the government’s modest acceptance of its limited revenue performance capabilities. 

 

The fiscal deficit remains elevated at 6.4 per cent in FY23 revised estimate (RE), which is almost double of what it was in FY19. The target—it is nonsense to talk of a “glide path” as there is none- is 4.5 per cent, which is close to the pre pandemic level in FY20 and well below the 3.5 per cent achieved by Arun Jaitley in FY17. The big success of this government across the last three years has been to reduce the proportion of borrowing devoted to consumption (revenue expenditure). In FY19, 70 paise in every rupee borrowed was used to finance consumption expenditure. This has steadily fallen to 63 paise in FY23, and is projected to fall to 48 paise in FY24. If achieved, this would be the highest level of borrowing devoted to capital expenditure since FY07. 

Those intoxicated by Amrit Kaal are hailing this as a quantum increase in public capital spending, mesmerised by the absolute Rs 10 trillion capital expenditure budget estimate, which is 3.3 per cent of GDP. However, the combined capital outlay of the central government as well as central public sector enterprises is 3.9 per cent of GDP -- exactly the same as in FY20. Increases in budgetary capital outlays have matched decreases in public sector capital outlay. There is, of course, a welcome increase in loans for capital spending to states, which is 1.23 per cent of GDP, but this will to some extent at least substitute for capital expenditure budgeted by the states. Even so, it is a good thing, though as most things with this government, quite modest relative to the raucous boasting by its cheerleaders. 

The continued inability to mobilise resources means that all fiscal consolidation is to be secured through expenditure compression. In FY23, the fiscal deficit was reduced by 0.3 per cent on the back of an expenditure compression of 0.7 per cent of GDP, the remainder being used to compensate for a fall in receipts. In FY24, it has proposed to further compress the expenditure by 0.4 per cent, which is exactly equal to the fall in the fiscal deficit. Thus, I stress again what I have been pointing to since 2019: The entire policy system is, at its peril, turning a blind eye to the stark fact that the central government is severely fiscally constrained and, therefore, only able to secure consolidation through expenditure compression. This is why invoking the so-called fiscal multiplier is fallacious and analytically lazy. Shrinking public spending cannot possibly activate any multiplier or compensate for deceleration in either private investment or consumption. 

The consequences of this fiscal constraint can be seen in the fact that increasing budgetary capital allocations has required a decrease in allocations to important demand stabilisers like the Mahatma Gandhi National Rural Employment Guarantee scheme. This is despite the fact that, laudably, food and fertiliser subsidies have been cut by 0.64 per cent of GDP, but this fiscal saving had to be used to meet fiscal consolidation and maintain capital spending rather than protect welfare-oriented expenditure. While, no doubt, the fact that this government does not need to deliver on economic prosperity to win elections makes this difficult choice possible, it is by no means a preferred solution. 

One of the continuing irritants on the resource mobilisation front that damages this government’s room for manoeuvre is the continuing underperformance and fudging on disinvestment. Privatisation requires solid political capital and considerable execution capability. It is by now clear that neither is available to this government. In FY20 the government missed its target by Rs 55,000 crore. In FY21, by a whopping Rs 1.7 trillion. In FY22, the government claimed to have missed its target by Rs 97,000 crore in the RE. The final numbers reported in the 2023 Budget revealed that, in fact, less than Rs 15,000 crore finally accrued; thus the government missed its target by Rs 1. 6 trillion. 

In the face of this incompetence, the ministry was forced to revise its target to Rs 65,000 crore in FY23. The RE claimed that this target has been substantially achieved, which I challenge on past record, given that less than half this number was achieved by the end of 2022. This sort of amateurish budget management is extremely detrimental to the credibility and efficacy of the government’s fiscal policy. It is imperative that the political authorities fix this problem and hold those responsible accountable. 

For the rest, the Budget has persisted with welcome direct tax reforms, though the impact of this on the so called “middle class” is overblown. Self congratulatory rhetoric and assertions about the inevitable rise to greatness and global prominence of New India was mercifully tempered in the Budget speech by the skillful use of shorthand, Amrit Kaal, which was invoked nine times. The speech was also short and paid adequate attention to the macro-fiscal picture. 

This is all welcome, but there is no downplaying the serious structural fiscal challenges that confront the government and the consequences this has for delivering a growth strategy, or for measures to improve the lives of the ordinary Indian. To manage a difficult situation is not to resolve it. 

The writer is managing director, ODI, London. r.roy@odi.org