Budget: Not populist, but expansionist, and will hurt the poor

The biggest example of fiscal push for growth is the 33% increase in capital outlay, which lays the foundation for future growth

This is Finance Minister Nirmala Sitharaman’s fifth budget, and the last full plan before the general elections of 2024. There was an expectation that it would be a full throttle populist budget, and that any fiscal deficit limit would be thrown to the winds. Thankfully, that’s not the case. The fiscal deficit target of less than 6 per cent of expected GDP next year is reasonably restrained, although it could have been a more stretched target. Fiscal austerity is a must for several reasons.

The debt-to-GDP ratio has already climbed to 90 per cent. High deficit adds to the borrowing requirement which, in turn, adds to the debt mountain. As the mountain grows, so does the cost of servicing the debt, i.e., interest payments. The interest burden next year is a whopping Rs 10 lakh crore, equal to the entire capital spending of the Centre. In fact, much of the deficit is eaten away by interest payment obligations. It is as if the interest burden and the deficit mutually reinforce each other, and soon we might be in a debt trap, i.e., simply borrowing to pay for interest alone. Hence, fiscal consolidation is a must. High fiscal deficits are also a penalty imposed on future generations. Hence the FM promised to bring down the deficit steadily in the next few years. That needs economic growth to pick up, so that tax revenues are buoyant and then the government does not have to depend on borrowings.

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The other reason to be cautious about excessive fiscal expansion is that it is counterproductive to tackling inflation. It acts against the monetary policy of tightening money supply. On this count, the budget plan has done a reasonably good job of fiscal restraint and growth inducing fiscal expansion.

The biggest example of fiscal push for growth is the 33 per cent increase in capital outlay, which lays the foundation for future growth. This is at Rs 10 lakh crore, and is one-fourth of all spending. The credit allocation to the farm sector will also rise to Rs 20 lakh crore, which is the highest it has been. This, too, should help increase farm productivity, value addition in agro-processing, and farmers’ incomes. As such the PM-KISAN scheme of direct cash transfers continues to go to more than 110 million farm households.

One big macro backdrop to the budget is the continuously widening income and wealth inequality. Hence, a bigger emphasis on social security was expected. But the budget disappoints by drastically cutting down on the rural employment guarantee scheme (a proxy for unemployment insurance, which does not exist in India) and also less allocation on national health and education missions. Perhaps the Centre believes that these are in the domain of states’ budgets and hence is left to the states. Of course, the Finance Minister reminded us about impressive achievements in financial inclusion via no-frills bank accounts, subsidised cooking gas cylinders, toilets and such like. Even the dramatic expansion in low-cost housing scheme is in that direction, and it has the additional aspect of being an asset-creating public spending. In that spirit, the increase in capital outlay, especially on road and rail, is quite welcome.

The big news was increasing the minimum threshold for paying income tax. Since high inflation in the past three years has eaten away real purchasing power, it was expected that the slabs which are nominal would be revised. But raising the minimum level to Rs 7 lakh, which is 350 per cent of the per capita income of the country (as mentioned by the FM herself) makes India an outlier among peer nations. None of the G20 countries give such a generous exemption to income taxpayers.

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The Economic Survey a few years ago had pointed out that India has only 7 taxpayers for every 100 voters. This is in sharp contrast to developed nations, or in Scandinavia where the ratio is nearly 1 to 1. So, widening the tax base is an absolute imperative, something that every budget seems to ignore.

Indeed, the share of indirect taxes in total tax is at 55 per cent now, and has been rising. This is regressive, and cannot be justified merely because indirect taxes like GST are easy to administer and collect. The Centre’s share of GST is now at nearly Rs 10 lakh crore, in addition to still high excise duties on petrol and diesel. All of this is extra and disproportionately burdensome to the poor. The budget is not populist but is certainly expansionist. In that respect it will create inflationary pressures, which too hurt the poor more.

Apart from the enhancement to capital outlays, there is a welcome focus on green growth and sustainable development. India has committed to a net zero-emission economy in the next 50 years, so our GDP must be greener. Hydrogen has the promise of an ideal fuel which when burnt produces just clean water vapor. All forms of renewable energy sources, such as solar, wind, biofuels, agro-waste and hydrogen must coexist to achieve our ambitious climate targets. Hence on this the budget sent the right signals.

The budget is merely a plan. Achieving the plan depends on not just domestic business, consumer sentiments and political winds but also the global situation. The Russia-Ukraine war is now in its second year, and America is sending Ukraine tanks. Oil prices might still jump despite recessionary winds.

China is waging a cold war in technology with the West and fighting new challenges like a shrinking workforce and effects of a zero covid policy. How the year plays out is very uncertain, but India’s domestic thrust and momentum should ensure a fast- growing economy. And if that happens, all the budget targets will be met.

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