Budget 2023-24: Continuity with Change | Atul Sarma and Shyam Sunder

by Atul Sarma and Shyam Sunder *

Budget 2023-24 has been presented in the face of multiple challenges: slowing global growth, elevated core inflation and food prices, and looming recession in advanced countries. At another level, this being the last full budget before the general election in 2024 as also approaching election in nine states has its temptation to make it as voter friendly as possible.

Nevertheless, the budget has restrained itself in offering any direct freebie. It has pursued the path of fiscal consolidation and growth. The fiscal deficit is contained at 6.4% of GDP in revised estimates as budgeted and further reduced to 5.9% for Financial Year (FY) 24 keeping in view the stated target of achieving 4.5% by FY 26. But then the target of 4.5% is well above the original target of 3% stipulated in the Fiscal Responsibility and Budget Management Act. Again, the primary deficit which is the fiscal deficit minus interest payment should be zero to give fiscal sustainability. But it is projected at 2.3% for FY 24 while it was 3% in the preceding year.

One positive move is that the revenue deficit indicating the size of borrowed fund being used to finance house keeping expenditure has been brought down to 2.9% of GDP from 4.1% in revised estimates (RE). The effective revenue deficit which is net of grants in aid for creation of capital assets is still lower at 1.7% of GDP. The revenue deficit as percentage of fiscal deficit has come down to 48.7 % in FY 24 from 63.3% in FY RE 23. In fact, the revenue expenditure net of interest payment is reduced by 3.8%.

Whether curbing revenue deficit is prudent or not depends on how it is brought about. Allocation in agriculture and rural development is cut significantly - it is much less than that in the pre-Covid year, 2019-20. The allocation under the heads that is proposed to be reduced in comparison with the revised budget FY 23 is for food subsidy by 36%, fertilizer subsidy by 22% and rural development by 13% - MGNRGA within rural development is sliced by 33%. Lower allocation under MGNRGA in the context of high unemployment and elevated and sticky core inflation will add to rural distress. Savings from the reduction of food and fertilizer subsidy should have been deployed on R&D for agriculture keeping in view the possible impact of climate change on agriculture and the Government’s focus on popularity of millet consumption.

The nominal growth assumed at 10.5% looks conservative. For, the real growth projected is 6.5% which implies inflation rate of just 4% as against RBI set inflation rate of 6.8%. However, estimating revenue target based on assuming lower nominal growth flexibility in achieving or even exceeding the target.

While tax revenue target is exceeded, the tax buoyancy implied in the budget is only 0.99. Resource mobilisation through tax sources have been long neglected even though India’s tax-GDP ratio at 18% is the lowest among the major emerging economies like China, Brazil and South Africa whose corresponding ratio ranges from 22 to 28%.

Capital expenditure led growth initiated in the last budget is continued in this budget with far more vigour by raising effective capex - ₹10 lakh crore directly by the Centre and 3.7 lakh crore by the states- to INR 13.7 lakh crore or by 30%, forming 4.5% of GDP. Focus on infrastructure and capital expenditure is expected to create productive capacity of the economy as also while crowd in private sector investment, which would together lead to growth and employment. In principle it sounds good. But in reality the story is not that encouraging. The Government of India drastically reduced corporate tax and stepped-up capital expenditure between 2019-20 and 2022-23 but the gross capital formation is yet to reach the level of 34.1% in 2019-20.

The reason for lukewarm response of the private sector is that the economy is highly aggregate demand deficient. Such situation does not encourage private producers to create new capacity. Even with some rise in aggregate demand in the post-pandemic years, Indian industries find more than a quarter of their capacity unutilised.

Domestic consumption is the biggest driver of growth. More so, with slow global growth or looming recession in advanced countries, export growth, another driver of growth does not seem robust. Private final consumption still stands at 57.2% in 2022-23 as per First Advance Estimate of National Income as compared to 61% of GDP in 2019-29.

High inflation and expensive private sector supplied education and health services have eroded the purchasing power of the middle class comprising 432 million people (estimated by PRICE, a Think Tank). As a departure from the preceding budgets that focused on supply side measures to spur growth, this budget rightly has introduced measures to boost aggregate demand.
Several types of tax relief including the new tax regime as a default regime with no deductions but higher level of ₹ 7 lakh tax-free income leading to the revenue forgone in direct taxes to the tune of around ₹ 37000 crore will put money in the hands of taxpayers. This will in turn boost aggregate demand. The new personal income tax regime will not only benefit tax payers but is also a significant reform. But then taxpayers or even those who file tax return (around 60 million tax return filers as in September 2022) constitute a small percentage of the large middle class (13.9%). That obviously limits the extent to which aggregate demand would be spurred.
However, measures such as digital public infrastructure, agriculture accelerated fund, global hub for millets, massive increase in agri credit with focus on animal husbandry, diary, and fisheries and cooperative based development of agriculture which employs 46.5% of the workforce, infrastructure spending, allocation under integrated development of tourism around specific themes , centrally sponsored core schemes such as PMAY etc. are likely to create jobs thereby income which would in turn spur consumption. But only proper co-ordination with state governments in implementation of all the above proposals would yield the desired outcome.
The importance of the proposal of setting up three centres of excellence of artificial intelligence in three top educational institutions which is in sync with the growing application of new age technologies cannot be overemphasized.

Over all, the projected growth of 6.5% for 2023-24 which is credible is remarkable in the face of huge global uncertainties. FY 24 budget claimed to be the first of the Amrit Kaal spanning over 25 years has aimed at laying the foundation for taking the Indian economy from the low middle-income to a high-income country. The framework with seven priorities-inclusive development, reaching the last mile, infrastructure and investment, unleashing the potential, youth power, financial sector and green growth, however, has completely ignored the possible pernicious consequences of worsening income disparity and widening inter-state disparity on the economy and social fabric

(Authors: Atul Sarma (sarmaatul[at]yahoo.com) is a Distinguished Professor at the Council for Social Development & Former Head and Professor of Economics, Indian Statistical Institute, Delhi Centre and Shyam Sunder (shyams.eco[at]gmail.com) is working with an Indian Corporate. Views are personal.)