Nirmala Sitharaman’s interim budget speech focused on presenting the central government’s intent -- to make India a developed country or “viksit” by 2047. It followed the roadmap outlined in the Chief Economic Advisor’s review of the Indian economy. One must not find any fault with good intentions. We all want our children’s future to be better than ours. However, the intent can only be as good as the resource mobilisation and allocation strategies that allow the government to support the household and business effort.
India’s economic reality
We are a low middle-income country with hundreds of millions of poor people living in urban as well as rural areas. We have, to an extent, managed to lower the number of people living in abject poverty, as measured by our version of the Multidimensional Poverty Index. But we still have 80 crore people who need free ration for the next five years and malnutrition is pervasive.
Our labour force participation rate, particularly for youth, continues to be poor. We also have a long way to go in building the required economic and social infrastructure.
We must solve the above-mentioned problems while dealing with the technological transition currently underway.
We can, of course, achieve the objective of being a developed country if we raise the required resources and allocate them wisely.
Does the budget try to generate resources required for financing growth for “viksit” Bharat?
Table below shows that the current central government spending (as a % of GDP) is about the same as it was during 2007-08. Since the fiscal deficit is higher than in FY-08, it implies that the net tax and non-tax receipts of the central government are lower than what they were 15 years ago.
While the table suggests that the state governments are getting a higher share of central collections, we must remember that the states were collecting their own indirect taxes in the pre-GST era.
Let us now identify the areas that have resulted in lower revenue collection.
The Table below shows that we have been collecting far lower corporation tax than in the past and the share of indirect taxes in gross tax receipts too has fallen. Households are contributing a much higher share through payment of tax on their income.
The questions that we must ask then are:
1. Do we need less or more resources for financing our growth today than we needed in FY-08?
2. If we do need additional resources for financing our growth, why are we not able to raise them?
To put it simply, we do need more resources than we needed in 2008. Many of our families and small businesses are yet to recover from the losses caused by the pandemic and we have a larger population to build infrastructure for than in 2008.
In an earlier article, the challenge we face in solving the employment problem, which is resulting in loss of productivity, too had been highlighted.
No country has grown without solving the employment and the productivity problem. We cannot have the youth workforce participation level of just about 40% and hope to progress.
One of the reasons for lower resource mobilisation is the reduction in contribution from corporation tax, as seen in the table above. The share of corporation tax had started falling during 2019-20 after the government offered an across-the-board reduction in November 2019 for encouraging investment and the businesses were closed due to lockdown during the last week of March 2020.
In addition, we need to invest in areas where even the large business houses, except a few, are in no position to invest -- Roads, Railways, Water, Sanitation, Ports, etc.-- or will invest only if we create private sector monopolies. Not to forget the subsidies and incentives that we need for attracting global players in manufacturing and research.
Does the government expect households and business to do heavy lifting?
One of the opening remarks in the budget speech was this statement:
“Conditions were created for more opportunities for employment and entrepreneurship.”
It was later followed by an assertion.
“Our Government stands committed to strengthening and expanding the economy with high growth and to create conditions for people to realize their aspirations.”
The above two statements seem to suggest that the government’s role is to create required conditions and the rest is to be done by households and businesses.
But how when about 40 million people have moved back to agriculture and 80 crores need food subsidy, rural monthly household income is Rs. 10,484 and many MSMEs are still struggling to recover from the pandemic-related losses? The problem is intractable for large businesses too, given its scale and their need to focus on profitability ahead of social work.
'Sunrise' of a Rs 100000 crore corpus
The government does seem to recognise that even the large corporations don't have the ability to invest in their and our future. It has mooted a proposal to set up a Rs 100000 crore corpus for lending to private sector to "encourage… to scale up research and innovation significantly in sunrise domains." The proposal is expected to create a golden era for our tech-savvy youth. But then research and innovation in sunrise domains needs equity capital and not debt, even if it is long-term -- unless, of course, we are just talking about building low value-adding consumer apps.
In summary, the interim budget, like the earlier ones, is good on intent but displays a limited understanding of the resource mobilisation challenges in meeting the objective of becoming a developed nation or helping hundreds of millions of our young people to find meaningful work that can give them a fair chance at a productive life.
Does the Budget, at least, allocate resources for areas of national priorities?
Resource allocation is not the easiest problem to solve in normal circumstances. In a country with hundreds of millions of poor, but where the politicians are aspiring to make us a developed country, it becomes even more difficult to establish the principles on which we can test the effectiveness of budget allocations.
Capital Expenditure
The central government has been raising the level of capital expenditure consistently, particularly since FY-21 and FY-22. The biggest increase in allocations has come for the ministries of road transport (up from 0.45% in FY-21 of GDP to 0.89% of GDP in FY-24) and railways (up from 0.55% in FY-21 of GDP to 0.81% of GDP in FY-24).
The increase in the Ministry Road Transport's allocation is largely governed by the fact that the NHAI was struggling to get private sector participation in road construction, as the private sector was not able to raise equity or debt capital on their balance sheet. Increase in railways expenditure is explained by introduction of new trains, transfer to safety fund, etc.
However, both the ministries are budgeted to get a much smaller growth in the next budget – 2.9% for road transport and 5% for railways.
Does it mean that we once more expect the private sector participation to increase, or the incremental level of investment can be financed with current level of allocation?
Another cause of concern is that, at the end of December 2023, we have spent only 67% of the budgeted amount. In the capital context, the spend is usually front ended. It is, therefore, not surprising that the revised budget has cut the capex estimate by Rs 50,715 crores.
Revenue Expenditure
While the annual growth in revenue expenditure at 12% between 2019 to 2024 is less than half that of capex, it is still higher than the nominal growth in GDP at 9.4%.
Consequently, we have had significant increase in subsidies. While petroleum subsidies are negligible, the food and fertiliser subsidies are large now.
We cannot have a bigger signal of distress than food subsidy – having to be given across the board for coming give years.
We are living in denial, if we start believing in “all izz well” message in the budget, which implies that these subsidies will need to be provided for.
Given that the government has been and continues to focus on fiscal consolidation, the provision of subsidies comes at the cost of allocation in other areas.
For example, MNREGA’s budget allocation in FY-24 at Rs 60,000 crore was less than the actual expenditure in FY-19 at Rs 61,815 crores. The government has been now forced to raise the allocation to Rs. 86,000 crores under revised estimates. It is still hoping to cap the allocation to Rs. 86,000 crores next year -- with no increase in allocation even when food inflation is running high and employment generation is nowhere near the required level.
Allocation to the national health and education mission and Saksham Anganwadi and POSHAN programmes too have met the same fate as MNREGA.
PM-AWAS and Jal Jeevan programmes have, of course, received greater allocations. Both address a critical need. The good part is that PM-AWAS reflects on the fact that housing has become unaffordable even for high income households.
PM-AWAS is classic case of denying the reality, as the programme provides interest subsidy to people who are considered affluent by influential financial firms like the Goldman Sachs who are trying to persuade businesses to invest in India. Hopefully, we would see some policy that would help lower the cost of construction and land – the most appropriate solution – allowing the affluent consumers to finance their own houses or raise their consumption in other areas.
A couple of other observations that need attention.
Decline in rate of growth of nominal GDP or the quirky deflator
The revised rate of growth in nominal GDP during FY-24 is now estimated to be lower at 8.9%, compared to 10.5% as part of the budget exercise last year. The first advance estimates show the real rate to be 7.3%, implying an average GDP deflator of 1.6%.
Does it indicate deflationary conditions or that the GDP deflator is quirky?
We have seen a significant divergence between nominal and real level of Gross Fixed Capital Formation (GFCF) during the last few years (Table below).
The divergences may just be statistical quirks but need investigation, given that the real rate of growth during the current year is much higher, even when the nominal growth has declined. Hopefully, we will hear something from the ministry soon.
Spending till December is missing the mark in some of the Revenue Expenditure heads too
The aggregate revenue expenditure till December 2023, as a % of budget, is lower at 68%, compared to 73% last year. Surprisingly, some the key ministries like health and family welfare, education, animal husbandry, skill development, farmers’ welfare, water resources, MSMEs, housing and urban affairs, power, social justice, etc. have spent less than 60% of their budgeted expenditures. On the other hand, the ministries of defence, railways, roads, and fertilisers have spent more than 80% of their budget.
The question we have is: how would these spending ratios change in Q4 and what impact would that have on allocations across the board, if fiscal deficit target must be met?
In summary, the interim budget is good with intentions, but lacks a corresponding effort to mobilise and allocate resources that can put us on the path of becoming a developed country.
The government does not have to shy away from recognising the economic reality that India faces -- low labour force participation, increasing dependence on agriculture, low productivity growth and the resource mobilisation level that is same as FY 2008. The welfare programmes are, at best, addressing the problem of daily food (not necessarily nutrition), but not aspirations.
Since it is just an interim budget, it is expected that the government will use the next few months to reflect and reimagine the fiscal policy that can put us on the path to a glorious future. One where we don’t obsess about whether we are the world’s fastest growing large economy or not and instead address the real and pressing issues.
Professor Anil K Sood is the co-founder of the Institute for Advanced Studies in Complex Choices (IASCC) based in Hyderabad.
