In the wake of the Covid-19 pandemic and the Ukraine-Russia conflict, it’s no secret that maintaining fiscal responsibility is a tall order. But, as John Kenneth Galbraith (economist and 7th US Ambassador to India) once noted, fiscal responsibility is like chastity—easier to profess than practice. Furthermore, when the government drafts a budget in the election year, there is always an urge towards fiscal profligacy like loan waivers, announcing freebies, etc. There is always a possibility to throw fiscal prudence to the winds. To everyone’s surprise, Nirmala Sitharaman, in this election year’s budget, has demonstrated the art of avoiding the temptation of fiscal profligacy by sticking to a prudent fiscal plan. Despite the challenges, the government has set an example for the rest by putting words into action.
This year, we again find ourselves in uncharted territory, grappling with a double whammy of supply and demand disruptions. The resulting inflationary pressure has been felt globally, and in response, central banks have launched a synchronised and unprecedented monetary tightening reminiscent of the 1980s.
The finance minister faced a delicate challenge in navigating this economic landscape. With a keen eye on maintaining macroeconomic stability, the budget strikes a balance between addressing the inflationary pressures and supporting a growth rate impacted by external factors. A tightrope walk, but one that requires steady nerves. We have identified seven areas in which this budget has done exceptionally well.
1) Fiscal Discipline: In recent years, the Centre has demonstrated exceptional fiscal discipline, consistently meeting or exceeding its deficit target. India’s fiscal deficit shot up to a record 9.3% in 2020/21, from 4.6% the previous year due to pandemic-related spending. This year, despite formidable fiscal challenges owing to the ongoing Russia-Ukraine conflict and global economic uncertainties, the government deserves accolades for reinforcing its resolve to stick to the fiscal deficit target of 6.4%.
For next year, the Centre has committed to bringing down the fiscal deficit to 5.9%. This reduction is in line with the government’s earlier commitment towards the fiscal deficit target of 4.5% of GDP by the end of 2025/26. This doesn’t have to be linear. Even if the reduction is by 0.5% next, there may be more opportunities for substantial consolidation and growth as global recession and headwinds would be behind us in the first year of the next government. Thus, there will be more room for fiscal consolidation in the next two years.
2) The economic survey may have shed light on the resurgence of private investment, but with global challenges and monetary constraints, it alone may not be enough to drive growth. This is where the government steps in, with an unwavering commitment to revive the economy—demonstrated by allocating a record-high ₹10 trillion for long-term capital expenditure in 2023–2024, surpassing the previous year’s budget of ₹7.5 trillion, thus providing a cushion from global headwinds. A 33% increase year-on-year shows that the government is putting the money where its mouth is and that growth is within reach. The Centre has done its bit and has passed the baton to the private sector to make its mark.
3) Again, increasing the revenue expenditure in an election year is exceptionally rewarding as it is believed that the median voter would appreciate the fiscal profligacy. The recent state elections have shown that the voters have not been deterred by the financial risks associated with the much-debated old pension scheme (OPS). Despite being deemed a fiscal disaster, the political parties that campaigned for its revival have come out on top. OPS is just one example. The FM’s focus has been mainly on propelling growth through capital expenditure.
4) At the same time, the Centre is also incentivising states to increase their capital expenditure. The FM has decided to continue a 50-year interest-free loan to the state governments for one year. The states have been given autonomy to spend this at their discretion, with a catch—a portion of it is contingent upon increasing their actual capital expenditure. But what will they spend it on? The Centre has tied parts of the outlay to either reforms or allocation to priority areas. This includes urban planning reforms, financing reforms in ULBs to make them creditworthy, state share of capital expenditure of central schemes, etc. Thus, there will also be an inherent incentive for the state governments to ensure the quality of public expenditure.
5) One may argue that the personal income tax concessions go against the government’s stance on fiscal prudence. The Centre sees it as a way to incentivise people to switch from the outdated, exemption-riddled old tax regime to the streamlined new tax regime. The old regime is the source of countless tax disputes, clogging up tribunals and courts with questions about exemptions. The move to the new regime is a critical step towards simplifying the tax system.
6) In the past two budgets, the Centre took bold steps to bring off-budget borrowings, like those of the Food Corporation of India previously, in its light. By doing so, they aim to offer a clear picture of the government’s financial obligations, enabling informed decisions and assessments. Previous FMs acknowledged the issue with off-budget borrowings and made hollow announcements which were never fructified. P Chidambaram, in his budget speech (2008–09), stated—“I acknowledge that significant liabilities of the government on account of oil, food and fertiliser bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent. There is a need to bring these liabilities into our fiscal accounting.” However, it was Nirmala Sitharaman who made it a reality. She has continued with this tradition this year.
7) Lastly, the budget’s thrust has been on inclusive development. From women empowerment to increasing the outlay on the PM Awas Yojana by 66% to over ₹79,000 crore, the government is leaving no stone unturned to adhere to its policy of “Sabka Saath, Sabka Vikaas and Sabka Prayaas”.
Once again, the finance minister has stuck to the template of underpromising and overdelivering. There is a continuity in the government’s economic strategy. It has definitely proved Galbraith wrong. Fiscal prudence can be practiced even during the election year.
Bibek Debroy
Chairman, EAC-PM
(tweets @bibekdebroy)
Aditya Sinha
Additional Private Secretary (Policy & Research), EAC-PM
(tweets @adityasinha004)