Fiscal Consolidation in the Context of the Budget
Introduction:
- The objectives of many socioeconomic groups are intended to be included in the Union Budget for 2023–2024. In the given situation, the effort is laudable. The Budget’s provisions, however, do they adequately address the two main goals of stability and growth? Over the medium term, sustained growth will be the answer to many of India’s social problems, and it depends on the two.
Budgetary support for expansion:
- Growth is influenced by the total amount of government spending as well as its revenue and capital components. Government spending is expected to rise by 7.5% in line with the budget, although nominal GDP growth is expected to decelerate from 15.4% in 2022–2023 to 10.5% in 2023–2024.
- The total spending as a percentage of GDP will therefore decrease from 15.3% in 2022-2023 (RE) to 14.9% in 2023-2024, as illustrated. (BE). However, the composition of government spending would be favourable to growth.
- Compared to a 37% rise in capital expenditures for the Center, budgeted increases in revenue expenditures are only 1.2%. Forecasts from the Reserve Bank of India state that the multiplier for central government capital expenditure is 2.45 while the multiplier for revenue expenditure is 0.45. (2019, 2020). The central public sector undertakings’ (PSUs’) planned decline in investment spending is 0.2% points.
- State capital expenditures, however, may increase as a result of federal grants to the States totaling 1.2% of GDP for the purpose of constructing capital assets, an increase in the States’ fiscal deficit to GDP ratio to 3.5%, and the availability of 50 years of interest-free loans for the same purpose in 2023–2024.
- It is hard to foresee how States would employ these facilities.
- Growth may also be indirectly encouraged as a result of an increase in private disposable income brought on by tax slab modifications that are applicable to the new income tax regime. Real growth in 2023–2024 might be just a hair above 6%.
- Outside influences as a cause:
- Although this is an operational objective, the Centre must take the appropriate steps to keep its budget deficit at 3% of GDP by March 31, 2021, in accordance with the Budget Responsibility and Budget Management (FRBM) Act, as amended in 2018. To fulfil the statutory goal, the Center’s debt-to-GDP ratio must be lowered to 40%.
- If the fiscal deficit-to-GDP ratio is more than 3% higher than expected, the Centre is required to give justification. In the medium-term fiscal policy statement, the Center ascribed the deviation from the budgeted fiscal deficit-to-GDP ratio of 5.9% on external economic factors (MTFP). Due to this, the Center has also resisted making projections about the growth of the economy over the medium term.
- Furthermore, the Center has not specified the year in which it expects to reach a 3% GDP fiscal deficit. Instead, it anticipated reaching 4.5% of GDP by 2025–2026 and proposed for a more pronounced adjustment of 0.7% points over the following two years. It could take another two to three years to reach 3%.
- Even at this moment, the 40% statutory debt-to-GDP ratio would not have been reached. The Center’s debt-to-GDP ratio will rise from 55.7% in 2022–23 (RE) to 56.1% in 2023–24, according to budget projections, net of liabilities owing to investments in special state-issued securities covered by the National Social Security Fund (NSSF) (BE). This rise is forecast given that the primary deficit to GDP ratio is projected to be 2.3% in 2023–24.
- The MTFP statement does not mention the government’s intention to reach the required debt-to-GDP ratio of 40%. The high debt to GDP ratio of the Center has an impact on interest payments, which are anticipated to account for 41% of income receipts in 2023–2024. As a result, the Center’s budget for basic needs has substantially less room.
Personal investment:
- To accelerate growth over the medium term, private investment as a percentage of GDP must rise. This requires giving the public sector first dibs on resources before giving the private sector an acceptable number of investable resources.
- Current estimates place the total amount of investable resources at 10.5% of GDP, with household sector savings accounting for about 8% of GDP and net foreign capital inflows amounting to 2.5% of GDP.
- The federal and state governments’ total budget deficit in 2023–2024 may be 9.4% of GDP. This means that only 1.1% of the resources are accessible to the corporate and public non-government sectors.
- The PSUs of the Centre will leave little leeway for State PSUs and the private sector by investing 1.1% of GDP itself in 2023-2024. This does not support an environment where interest rates can be reduced. In fact, trying to borrow more cash than the government has available for investment can only lead to inflation.
Conclusion:
- We are aware of the situation the government is in. Any further budgetary cuts would mean less spending, which might not be welcomed. However, we need a more substantial road map for budgetary consolidation in the medium run.
