Home / Opinion / Columns /  Sitharaman’s budget does well to strike the Pareto efficiency mark

Economists always try to balance their view with hits and misses while analysing the budget. When one looks at the one presented for 2023-24, it literally fits the bill of being a Pareto optimal budget, a state when no one really is worse off but some sections are better placed. This budget has pleased the sensibilities of all classes. Let us see how this has been done.

Economists will be happy that the fiscal deficit is on a path of prudence. The ratio is to come down from 6.4% of gross domestic product (GDP) to 5.9%, which means that the 4.5% mark is not really far away, and if conditions across the world remain stable, it could be achieved by 2025-26, as is currently being targeted by the government.

Bankers will be pleased that while the deficit is at 17.86 trillion, the Centre’s net market borrowing planned is at 11.8 trillion, which is similar to 2022-23’s. This means that there will be no extra pressure on liquidity in the market, given that presently there is some strain in the system. This has assuaged the bond market, as seen in yields coming down, albeit marginally, after these numbers were announced. This number will also provide comfort to the Reserve Bank of India (RBI), which comes up with its monetary policy next week. In fact, if takeaways of the latest Economic Survey are combined with the fiscal math of the budget, RBI will be able to take a more nuanced view on the repo rate, as inflation is projected to come down next year.

Corporates have always been asking for higher capital expenditure by the government. This argument is strong. If the government expands its capital expenditure, then it will crowd-in private investment. This theory sounds good, though has not worked in the past as corporates invest when there is profit to be made, while the government does so because it must do so as no one else is doing it. The capex target of 10 trillion for 2023-24 is substantial, and, as states normally put in an equivalent amount, it should help move the needle. The focus is on roads and railways, which have the strongest linkages with other sectors of the economy.

Individuals too would take comfort from some of the provisions made in the budget. Benefits for women and senior folks are welcome, as it protects them from the high inflation experienced in the last three years. Individual tax slabs have been changed, too, provided one goes for the new scheme. We can’t be sure how many would opt for it, as the response earlier was not too good. But to the extent that people do opt for it, there would be savings made that would either protect against past inflation or add to consumption.

The Union budget has been a bit conservative when it comes to pro-poor schemes. The outlay for the Pradhan Mantri Kisan Samman Nidhi scheme, for example, has been maintained at 60,000 crore, and there has clearly been no pitch to increase it. Similarly, the food subsidy bill will be coming down this year by almost 90,000 crore as there has been a merger of the free food scheme with the public distribution system, while the National Rural Employment Guarantee scheme has a lower outlay. Therefore, it can be said that the budget has also been in ‘withdrawal of accommodation’ mode, since the worst is behind us, as the Economic Survey has argued. This has actually enabled the government to reallocate funds to capital expenditure.

Are there any question marks here? The budget’s disinvestment plan could merit some discussion. The global environment will be uncertain in 2023. One is not sure of how foreign investors would behave and whether Indian stock markets would continue to show buoyancy. Under these conditions, expecting to raise 61,000 crore from sell-offs can be a challenge. The government has been optimistic of doing 60,000 crore in 2022-23 too, which means that there will have to be some big-ticket sales over the two months till March-end for around 29,000 crore.

The other question is on tax buoyancy. It has been assumed that taxes will grow by 12% compared to around 15.9% this year. Normally, this growth rate traces that of GDP. There was unusual buoyancy in tax collections in 2022-23 due to high inflation and pent-up demand. But can this be repeated, given that GDP growth will be 10.5% and pent-up demand could fade?

Therefore, the revenue side may offer some cause for apprehension. But the budget balances things and makes money work better by reallocating expenditure in favour of capital expenditure so that growth processes can be furthered. Budgets always work on assumptions of growth which can never be predicted in advance. Also, there are always possibilities of things going off-track, like a war or any other disturbance, which would require the budget to be revisited. Here the supplementary demand for grants plays a role where additional allocations can be made.

The budget for 2023-24 scores well on almost all these points, which is commendable. More so because there were expectations that in a pre-election year, there could be a proclivity to get a bit loose on expenditure in pursuit of ‘populism’. Instead, the government has steered past this cliché, stuck to a path of prudence and also turned growth-oriented.

Madan Sabnavis is chief economist, Bank of Baroda, and author of ‘Lockdown or Economic Destruction?’

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