The last time I wrote about the Indian budget, which was exactly a year ago, I had said that our budget-making is as per Murphy’s Law. I meant that in not realizing the previous year’s mistake, we once again created a union budget that ignored the needs of the common man and woman. This, while we were still recovering from the Covid-19 pandemic, and were hit by the Omicron variant of the coronavirus.
Now, I wonder if we aren’t proving another variant of Murphy’s Law: Murphy’s Law of Bureaucracy states that if something has to go wrong, it will go wrong in triplicate. This budget then would be the third supply-side budget that once again seems to ignore the ordinary household. Let me explain.
In a year of high inflation across the world and a global slowdown – with recession in some countries likely – it is imperative that India focuses on its domestic market and economy. In the years of the pandemic, India experienced a healthy surge in exports, but that has already waned and with increasing imports, our trade deficit is once again widening. This puts pressure on our current account deficit, which has already grown to an alarming 4.4% in the second quarter of FY 23. A weaker rupee makes our balance of payments and our repayment of external debt extremely precarious.
Focus on our domestic economy means that we must first ensure we get inflation down from its several years’ high levels. Core CPI in India at 6.1% is now higher than in the US where it has trended down to 5.7% and Eurozone, where it has stayed steady for two months at 5.2%. In order to protect ordinary folk from the adverse impacts of inflation, we must also make employment a national-level priority in India, which we haven’t been doing. Next, after three devastating years of the pandemic we ought to focus on areas that suffered the worst during this time: education and healthcare. We must attempt to rebuild efforts to not merely catch up on lost time, but steel ourselves for another similar calamity to hit us in the years ahead.
Instead, we are being self-congratulatory on how fast we are growing compared to other economies and how we will be the shining economy in the world. The Economic Survey, from what I heard on TV news and read in the newspapers itself paints a picture of a buoyant and growing economy, without stressing enough on certain age-old chronic problems such as unemployment, lack of human development, a disproportionately large informal sector, etc. that need to be tackled on a war-footing in our country. Resilience to Resurgence is a good alliterative title, but does it really analyse what the country needs? Usually, The Economic Survey also shares a few ideas on reforms that ought to be attempted, as a way of encouraging serious discussion and debate; this one seemed to lack any.
On the Union Budget 2023 itself, I think the Finance Minister, Nirmala Sitharaman was attempting a delicate balancing act between encouraging growth and maintaining fiscal prudence. On that count, she has managed to reassure investors and the markets that the Indian economy is on the right track. Of course, a lot depends on whether we actually manage to tame inflation in the months ahead, as that is what economists and the world will be watching. To that extent, one hopes that the government will allow RBI to do its job of controlling inflation, without pressuring them to pause rate hikes or worse, to start cutting rates, in order to stoke growth. In a pre-election year, this is highly possible.
The budget depends largely on another huge burst of capital expenditure to boost growth, increasing the effective capex amount even over last year’s. While FY23 effective capex was Rs 10.7 lakh crores, it is 13.7 lakh crores for FY24, an increase of a third. The government claims that this is to crowd-in private sector investment, but unless there is adequate demand in the economy, that is unlikely to happen. During the years of the pandemic, it was good to see gross fixed capital formation (business investment) grow considerably as a result of pent-up demand and as a share of GDP as well to 34.7%. One doesn’t know, of course, how much of this is government investment and how much is private sector and it is important that we have this data made public. It is possible that private sector investment has also gone up thanks to the government’s PLI scheme, but this is license raj by another name and it will take several years for us to know how beneficial any of this has been, both in employment generation and in economic output.
The problem is where this government capex is being allocated. Just like last year, it is NHAI, with an additional Rs 30,000 crores in 2023-24 BE over 2022-23 BE, taking the total spend next year to Rs.162,207 crores. PM Awaas Yojana, the government’s flagship affordable housing scheme has its allocation hiked by 66% to Rs 79,590 crores. Railways has received a capex allocation of 2.4 lakh crores for 2023-24, while defence spending BE has gone up to Rs 2 lakh crores. There seems to be a thrust on AI and EV technology in this budget, with a capital allocation of Rs 35,000 crores for Make AI in India and Rs 5172 crores on FAME for manufacture of hybrid and electric vehicles in India, double last year’s RE of Rs 2898 crores.
Last year’s tax collections were quite buoyant it appears from what one has been reading in the news and from the budget details. While 2022-23 BE indicated Rs 7.2 lakh crores for corporate tax, the RE has come in at Rs 8.35 lakh crores. And similarly for personal income tax, the BE for 2022-23 was Rs 6.8 lakh crores, while RE is at Rs 7.9 lakh crores. The direct tax collections BE for 2023-24 have been raised by similar amounts, expecting a robust growth; Corporate tax BE is at Rs 9.2 lakh crores and personal income tax BE is at 8.72 lakh crores. This year is expected to be a year of much slower economic growth even in India, so even with healthy tax revenue growth, there is obviously a need to cut expenditure in certain areas, in order to contain the fiscal deficit.
Just like last year, the budget for FY24 too cuts expenditure on education and health. BE for education has been lowered from 2022-23 levels to Rs 38,953 crores, when RE for 2022-23 is at Rs 39,553 crores. Similarly, for health mission, BE has been lowered from last year’s levels to Rs. 36,785 crores, while RE for 2022-23 is at Rs 33,708 crores. This, when our spends on education and healthcare as a percentage of GDP are already abysmally low and falling as can be seen from the World Bank. The World Bank numbers are far more flattering than our government’s own figures as reported in the latest Economic Survey. Therefore, it’s not just the absolute spends that matter; if spends on these dimensions of social infrastructure are being cut, while our GDP is growing at 6%-7%, then it necessarily means that as a percentage of GDP too, we are spending less on these important heads. It’s the quality of spends that matter as well, in order to ensure good learning outcomes. According to this study by ASER, education and learning outcomes were badly affected during the Covid-19 pandemic.
This is what I mean by India not investing enough in capacity building. A nation’s capacity doesn’t come merely from its physical infrastructure and technology capabilities; it comes from a nation’s human capital and capacity to work, innovate and contribute to the country’s growth. Here we are in supposedly India’s decade, with more than half the country not at work, and chronic high unemployment. As of February 3, 2023, the overall unemployment rate for India as per CMIE was 7%, with urban at 8.5% and rural at 6.3%. We are not merely wasting our so-called demographic dividend, we are not investing in our population’s future. The Finance Minister’s budget speech did mention education prominently, but if you look at the fine print, what you have is a succession of spending cuts in vital areas of human and social infrastructure over many years.
Another important area of spending cuts this year is MNREGA, the rural employment guarantee programme, to the tune of Rs 13,000 crores over 2022-23 BE to Rs 60,000 crores. This, when it had to be raised from the allocated Rs 73,000 crores to Rs 90,000 crores mid-year and the RE too is at Rs 89,400 crores. Next, both food and fertilizer subsidies have been cut, to Rs.1.99 lakh crores and Rs 1.77 lakh crores, respectively, with the distribution of the former being made free and brought under the central government, as I wrote in a previous blog post.
We are being very hopeful about the war in Ukraine ending soon, it appears, or underestimating what China’s reopening might do to international commodity prices. And believe it or not, our oil and gas subsidies have been slashed to ridiculously low levels of Rs 30,000 crores, with no figures mentioned for the previous years in the budget documents. Indeed, our deeply discounted oil imports from Russia soared to all-time highs last year and it was even reported in media that India is making huge profits on refining and exporting oil to other countries now. Reliance’s gain, I suppose. Not the ordinary Indian citizen’s, who has hardly had any relief on account of fuel prices. In fact, I believe that the main contributor to India’s stubborn core inflation is years of constantly increasing oil prices in India, as I have been repeating ad nauseam on my blog. I am waiting to see how the RBI manages to bring core inflation down.
The Indian middle class instead is being lured with relief in income taxes. The idea of two options in income tax regimes and slabs struck me as very strange, when it was introduced a couple of years ago by the Finance Minister, which is why I didn’t comment or write about it in my blog. I thought it might be for people who have no tax-saving investments to make, and therefore, no exemptions or rebates to claim and left it at that. Now that she has added to the confusion by saying that the new regime is the default regime, and has even made it more liberal by raising the exemption limit from Rs 5 lakhs to Rs 7 lakhs, I am even more perplexed. Besides, I never understood why Rs 15 lakhs should be the threshold for the highest income tax slab, when today a freshly minted MBA starts on a salary of nothing less than Rs 25 lakhs in India. Which world are they living in, I wonder.
Neither the government, nor the media has reported on what has been the response to the new tax regime in the past two or three years. And I often wonder if policies in India especially in recent years aren’t being made to suit certain unprofessional companies’ vested interests. But what I find inexplicable is why the government would want to actively push a regime that presumes the function of income tax is only to generate revenue for the government, or provide monetary relief for the taxpayer. What about its larger economic and social role in a country’s economy? What happened to the behaviour-enhancing role of taxes, in encouraging compulsory savings in the country, on which our banking system has traditionally depended? What about encouraging people to save for a rainy day, to invest in the family’s future or for retirement? This, in a country which is underbanked, underinsured and has no safety net to speak of.
Let us not forget that India’s gross domestic savings rate was always high in the 30% range, precisely because we don’t have a safety net. In the past decade or more, it is reported that our household savings rate especially has plummeted to all-time lows of 8.2% according to RBI data. Nobody seems to be perturbed by this phenomenon and instead this tax relief in the present budget was being hailed as a way to keep consumption levels up! Nothing can beat lower inflation in boosting consumption, in my view.
Besides, insurance companies were the worst affected as this active encouragement of no tax exemption on insurance policies in the new tax regime – not the exemption on Rs 5 lakh premium which is only for the wealthy few – eats into a huge slice of their business and earnings. Remember, insurance funds are what provide long-term financing, especially of infrastructure projects.
I don’t know if the government realizes this yet, but they are setting a dangerous new trend in how people work, earn, pay taxes, and save in this country, if they continue to go down this path. It also runs the danger of encouraging casino banking, and disincentivising saving as an income-earning ethic in the country. This, when we need to provide enough avenues for our middle class to earn well, and save as well as spend in a balanced way. The meteoric rise of buying everything on instalments and EMIs is already encouraging people to spend and live beyond their means. During the financial crisis, we saw the consequences of this play out in the west and we certainly don’t want to go there. Household debt in India is rising, according to the same RBI data, and with much of it probably of the unsecured kind, we need to be wary of what kind of consumption and saving behaviour we are encouraging, China already shows us what massive amounts of household savings and debt, with not enough investment avenues can result in: a real estate debacle of Evergrande proportions.
And finally, while the tax revenue of the union government was buoyant last year, the non-tax revenue has grown by much less. What’s more, I notice that the interest receipts, including from states and union territories, are higher than budget estimates for 2022-23 indicate. However, dividends and profits are much lower than FY23 BE and FY24 BE has been set at even lower levels than last year’s. It seems that the union government is earning more from states’ high indebtedness than from making their PSUs perform better.
The revenue deficit budgeted for FY24 is much lower at Rs.8.7 lakh crores, while last year’s was Rs 11.1 lakh crores. This year’s total debt is budgeted to be at Rs 106 lakh crores, while least year’s RE exceeded the BE amount by around Rs 3 lakh crores and came in at Rs 89.64 lakh crores. The gross market borrowings for FY 24 are a tad higher than last year’s RE of 14.21 lakh crores at Rs 15.43 lakh crores. I suppose bond markets haven’t yet reacted adversely – unlike last year – because of good tax collections, the fiscal deficit reduction path as well as the GDP growth expected this financial year.
Everything, of course, ultimately depends on how soon we are able to bring down core consumer price inflation. I would say that this budget too is not populist which is surprising, given that nine states go to elections this year and next year is the big parliamentary elections in India. Let us hope that this government’s third term, which it is widely expected to win, doesn’t go the Murphy’s Law way of the union budget. Ignoring capacity-building and going for broke on capex.