Home / Opinion / Columns /  It’s more pragmatic than populist in the final analysis

There were several factors weighing on expectations from the Union Budget for 2023-24. The big one was that this was going to be the last opportunity to present a full budget plan before the national elections of 2024. So, was it going to be full-throttle populist? Or is 15 months before elections too early to spend political and fiscal capital? Thankfully, the budget is far from populist. The fiscal deficit, targeted below 6% of GDP, is quite realistic. Although it could have been stretched some more, since the fiscal situation is dire. The government debt to GDP ratio is above 85%, and gross borrowings of 15 trillion (i.e. more than 40% of tax revenues) will take that mountain even higher. This will keep interest rates higher, the pain of which is felt most by the biggest borrower in the system, which is the central government. So fiscal consoli-dation is an imperative and a perennial missed opportunity. Another thing to remember in a year when inflation is still raging is that you can’t use excess spending to fight inflation. It acts counter to what the monetary policy folks are trying to do. Given all these constraints, the budget has done a reasonably good balancing act.

The second macro backdrop to this budget is the global recessionary situation. Most developed economies will have zero or negative growth this year. How then to respond and make India more resilient? Here too, the budget has provided incentives to exports, incentivized capital inflows and reduced tariffs somewhat to correct inverted duty anomalies. The emphasis is on strengthening domestic consumption spending. Investment spending too could be crowded in by higher public spending. As such, capacity utilization numbers look good enough for an upswing in private capex to begin.

The third backdrop is India’s widening income and wealth inequality. We don’t need an Oxfam report to confirm this continuing trend. The K-shaped recovery is in its third year, with consumer expenditure at the top-end booming, while lower income deciles face stagnation. Mercedes clocked 41% growth, but two-wheeler sales have been declining for three years in a row, alt-hough this year saw some rebound. Airline travel is booming, and so are five-star hotel services. But that cannot hide our rising unemployment and the pain of inflation. Inequality is like pollution. It is inevitable in a market-oriented capitalist economy. But beyond some reasonable level, it becomes detrimental to economic growth, as it deters investors and adds to social instability. So there was an imperative for the budget to enhance social security. On this point, the budget has disappointed. The allocation for the national rural employment guarantee (a proxy for unemployment insurance) has been drastically reduced. So has the allocation for national health and education missions. The latter is perhaps because these two are squarely in the states’ domain and more action could be expected in state budgets. The Union government’s strategy seems focused on spending on public goods that indirectly benefit the poor, rather than give outsight doles. Of course, the finance minister reminded us about impressive achievements in financial inclusion via no-frill bank accounts, subsidized cooking-gas cylinders, toilets and such like. Even the dramatic expansion in the Centre’s low-cost housing scheme is in that direction, and it has the additional advantage of being asset-creating public expenditure. In that spirit, the increase in capital outlay, especially on roads and railways, is quite welcome. It constitutes one-fourth of the budget, the highest share so far. The budget has also substantially increased credit flow to agriculture, which too will lead to more capital formation.

For the income taxpayer, there was good news in an increase in the threshold below which there is zero tax liability. Since high inflation in the past three years has eaten away real purchasing power, it was expected that tax slabs, which are nominal, would be revised. But raising the minimum level to 7 lakh, which is 350% of the per capita income of the country (as mentioned by the FM herself) makes India an outlier. None of the G20 countries offers income taxpayers such a generous exemption. The Economic Survey a few years ago had pointed out that India has only seven taxpayers for every 100 voters. This is a sharp contrast to developed nations, especially Scandinavian countries, where the ratio is nearly even. 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 collections is placed at 55% now, and has been rising. This is regressive and cannot be justified by indirect taxes like GST being easy to administer and collect. The Centre’s share of GST is now at nearly 10 trillion, in addition to still-high excise duties on petrol and diesel.

All of this is extra and disproportionately burdensome for the poor. The budget is not populist, but is certainly expansionist. In that respect, it will create inflationary pressures, which again hurt the poor more. If this budget’s nominal growth target of 10.5% is achieved but inflation continues to rage at 6%, then real growth will be too tepid to make a dent on unemployment and income growth of the lower deciles. It is here that the budget could have done more.

But ultimately the budget is an impossibly difficult balancing act, which tries to please all and often contradictory constituencies, sort of trying to square a circle. In that, it has been reasonably successful.

Ajit Ranade is a Pune-based economist

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