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February 21, 2023

Indian Economy|Capital Markets

Budget and the growth process

By Nitin Desai


Budget and the growth process

Nitin Desai

The government's command over household savings needs to be reduced for stimulating demand and private credit


The Union finance minister’s Budget speech indicates seven action areas that are covered mainly by listing about a hundred or so specific projects, old or new. Most of these projects fall within the competence and purview of other ministries. There is no discussion of strategy that could promote these ends through the economy.

This is not to say that the Budget speech should have done that. The main task of the Ministry of Finance is managing public finances and exercising its planning and oversight responsibility over the financial sector. The statement of development strategy and the priorities for public spending that it requires should really come separately, perhaps in an annual State of Development Report by the prime minister, particularly because of the PM’s role as chairman of the NITI Aayog.

The strategic impact of the Budget should be elaborated mainly in the revenue proposals that form Part II of the Budget speech, while the discussion on spending in Part I should deal only with strategic changes that will have a major macroeconomic impact.

The Budget Estimates (BE) of expenditure for 2023-24 show an increase of Rs 3.16 trillion over the Revised Estimates (RE) for 2022-23. Two items — the increase in interest payments and the increase in loans and grants to states — account for 76 per cent of the expenditure increase. But the Budget shows substantial increases in some other areas, including particularly the capital outlay, with significant reductions in some revenue items of expenditure.

A major item of reduction is in subsidies from Rs 5.6 trillion in RE FY23 to Rs 4 trillion in BE FY24. This is accounted for almost entirely by a sharp drop in the provision for food, fertiliser, and LPG subsidies. The increase in the outlays for SC and ST welfare, for youth welfare, and the gender budget, taken together is 9.2 per cent, well below the growth in the capital outlay. Note also the substantial reduction in the provision for the rural employment guarantee programme from Rs 89,400 crore to Rs 60,000 crore. So much for the goal of inclusive development.

From a spending perspective, of the seven goals cited for the road to the centenary of independence, the main substantial element in the Budget is the one on infrastructure and investment. This is reflected in the large increase in capital expenditure in the Union government’s Budget for FY24.

The Budget shows the capital outlay as Rs 10 trillion. Capital outlay by itself is not the same as capital expenditure in the sense of real investment. If one excludes the equity contribution to public enterprises and grants and loans to states, the capital expenditure from the Budget would be lower by about Rs 2 trillion. However, if one includes the capital expenditure of central public enterprises, the total would be about Rs 11.5 trillion. This would be about Rs 2 trillion more than the RE for FY23, which gives a growth rate of about 20 per cent rather than the 33 per cent stated in the Budget papers.

Much of the capital outlay is on the transport infrastructure. Thus, the Budget presents a 50 per cent increase in the capital outlay on Railways. However, if we combine the Budget outlay and extra-budgetary resources (EBR) from public enterprises for railway development, the increase is not 50 per cent but 6 per cent, because the EBR contribution to railway capital spending is significantly lower in FY24. This is clear in Statement II in the Railway budget information in the Budget documents. The 24 per cent increase in road transport capital outlay is not as affected as there is very little contribution from EBR in this area.

The capital outlay on infrastructure by the public sector will have a short-term growth impact through the multiplier effect of the rise in demand, particularly for items like steel and cement, and the increase in construction employment opportunities. Its more substantial impact on the growth process through the improvement in logistics is more long-term in nature.

What we need most urgently now are measures that will stimulate a substantial increase in private sector investment by corporations, new start-ups, and micro, small and medium enterprises. This requires demand growth, which the Budget has done only in a modest way with its income tax concessions and some import duty adjustments to help export growth. But one must also consider the impact of public spending on the availability of resources for private investment.

In practice, so much of the revenue resources are required for committed liabilities like salaries and pensions, interest payments on government debt and administration, defence, and security that capital outlay is largely funded by public borrowing, which draws mainly on net household financial savings.

Looking at the post-liberalisation record, one finds a clear difference between the post-1992-93 years to 2008-09, during which private investment boomed, and the years since then. In the first period, the net market borrowings of the Centre and the states plus the inflow from the net increase in the outstanding amounts of small savings amounted to an average of about 48 per cent of net household financial savings. In the second more recent period this has gone up to an average of 76 per cent. That surely is part of the reason for the continuing lethargy of private investment growth. This percentage is likely to remain around this level in FY24. This may not be an immediate problem because many corporations are flush with cash; but it is a medium- and long-term problem for stimulating private investment.

The fact is that despite the shift towards private sector investment since liberalisation in manufacturing and even infrastructure development, the post-liberalisation budgets of the Centre and the states have not created sufficient space for the flow of funds to the private sector. This is because of the very slow growth in the tax/gross domestic product (GDP) ratio and the continuing rise in the public expenditure/GDP ratio.

Between 1992-93 and 2019-20 there was a five-fold increase in real GDP. Yet the gap between the expenditure of the Centre and the states (net of loans and advances) and the tax revenue of the Centre and the states remained around 14 per cent of GDP. Thus, the government’s draft on private savings has not changed since the days when non-agricultural investment was very much in the public sector.

To put it more starkly, the public sector has surrendered responsibility for necessary investment to the private sector but continued to maintain its privileged command over private savings. This year’s Budget does not show a sufficient reduction in the draft of the central and state governments on household savings. This and the stimulation of the credit market for private investment must become a major target for fiscal policy.


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