Budget shows fiscal restraint

Since national elections are due soon, this budget was supposed to be passed by a vote on account, which meant that no special initiatives could be expected or inserted. Even then, the incumbent ruling party could be tempted to pump in some fiscal fuel to charge up the economy on the eve of elections. This is not unheard of in India’s own electoral history. A famous quip by an American president has been “It’s the economy, stupid." Implying that the voter always votes with economic interest in mind. That may not be wholly true of the Indian voter, yet the temptation of an incumbent government to provide fiscal expansion has always been there.

The most remarkable thing about Finance Minister Nirmala Sitharaman’s budget proposal presented on February 1 is the fiscal restraint. The proposed expenditure is barely 6 per cent more than this year. Of which the non-capex, i.e., revenue expenditure, is barely going up by 3.2 per cent. This is “non-productive” or routine expenditure, and its growth has been sharply curtailed. Two years ago, it grew at 8 per cent.

Even the capital expenditure is budgeted to grow at 17 per cent next year, much less than the rate of 31per cent growth per year seen for the past three years.

The FM reminded parliament that the fiscal deficit target of 6 per cent for this year had been met and had indeed improved to 5.8 per cent of GDP. That is good news for fiscal rectitude, although part of the success of a lower fiscal deficit ratio is because the denominator, i.e., nominal GDP, at only 8.6 per cent, lower than planned. Next year’s target for the deficit is only 5.1per cent, even though the denominator, i.e., nominal GDP, is projected to grow at 10.5 per cent. And the FM indicated that the following year, in 2026, the deficit target will be lower than 4.5 per cent. This is quite remarkable and shows that fiscal restraint is indeed the main flavour of this budget.

The fact that the FM did not indulge in any fiscal adventure could mean two things, and both may be valid. Firstly, the ruling party does not need fiscal sops, especially from the budget, to enhance its electoral prospects. Remember, during UPA-1, there was a substantial loan waiver announced about a year and a half before the national elections?

Secondly, the government now believes that growth cannot depend forever on fiscally supported capex by the public exchequer. This can have negative ramifications for the national debt. The International Monetary Fund had recently warned that India’s debt-to-GDP ratio could shoot up to 100 per cent. Of course, the government rebutted this dire prediction, saying that the debt ratio has actually come down from 88 per cent to 82 per cent post-Covid. And much of the debt is denominated in domestic currency, not in dollars.

But the point is that even at 82 per cent, the ratio is too high and is crowding out private investment and keeping interest rates high. Interest payments alone eat up nearly 40 per cent of tax revenues. So, fiscal consolidation is an imperative. Fiscal restraint is needed because higher deficits increase the interest burden and are inflationary.

The borrowing requirement for next year is marginally lower than last year. Some of this is because the redemption of some bonds is being postponed. But it brought some cheer to bond markets. There is no change in tax slabs, which is welcome, since India already has an income tax slab structure that is an outlier in the world. We begin taxing only above Rs 7.5 lakh annual income, which is nearly three times the per capita income of the country. The exemption limit is too high, and also the highest marginal tax rate kicks in too soon.

The FM’s speech presented major highlights and achievements of the government over the past 10 years. The growth in infrastructure, formalisation, gross enrollment in higher education, the founding of new institutions, are all impressive. The short economic report published on the eve of the budget speech had a special section devoted to explaining why the economy has become more resilient.

Indeed, if the growth of 7 per cent continues in the next year wracked by geo-political uncertainty and recessionary winds, it would be quite a remark-able achievement.

The longer-term sustainable growth requires consumption, private in-vestment and exports to all do well. Each of these components in turn requires that the employment situation be robust, investment sentiment be positive and India’s competitiveness improve so that we make a bigger dent in the export market. High growth is to be mainly driven by private enterprise, which in turn can generate healthy tax revenues to be used for welfare, health, education, pensions and the elderly. The eco-nomic policy stance needed to promote all this is well supported by the budget, in terms of its fiscal stance, and continuity of policies. Let us wait for the big bang reforms in the July budget.

(The writer is a noted Pune-based economist) (Syndicate: The Billion Press)