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Elections and budgets elicit the same amount of media attention, often even public interest. The difference, however, is that while the former take place every five years, the budget is an annual affair and sees repeated debates. Now that the Union budget of 1 February will be the last one before general elections in 2024, discussions are around whether populism will dominate its proceedings.

What should be remembered is that the government is responsible for and has committed itself to a path of fiscal prudence by which its budget deficit will reduce to reach 4.5% of gross domestic product (GDP) by 2025-26. Considering that the deficit was budgeted at 6.4% for 2022-23, it stands to reason that there will be a staggered reduction of around 0.5-0.75% of GDP in the next three years. Therefore, any conjecture on what the government will announce would be within this perimeter.

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It must be reiterated that budgets can never be precise because they are based on assumptions of growth which can never be gauged with full accuracy before the year begins. Hence invariably, fine-tuning of expenditures is required, which then becomes the fulcrum.

That said, expenditure outlays always generate primary interest. Here, interestingly, a large part is what can be called committed expenditure, or expenses that have to be incurred whether or not one likes it. Interest payments and pensions are items which cannot be cut and only tend to increase. Our defence outlay will probably increase in line with India’s ongoing border issues. Subsidies are necessary and the challenge is to roll-back what was provided as contingency in the last few years. Covid and the war in Ukraine had necessitated higher outlays that are not required now. This would be one of the challenges this time round. The budget for 2022-23 had allocated almost half its total outlay of 39.44 trillion for these purposes.

After meeting these fixed commitments, there are allocations to be made for other essentials like health, education and administration. Add to this transfers to states as grants for implementing centrally-sponsored schemes, and there is not much flexibility left. There are overhangs in the form of the PM-Kisan scheme, under which cash transfers were given to farmers, as well as the NREGA programme, whose outlay had to be upped from the 73,000 crore initially budgeted. Therefore, once the fiscal deficit level has been fixed, there is little room for bringing in any big-bang programme that involves a significant outlay. The production linked incentive scheme’s outlay can be increased, and will probably be done, but will turn into a big expense only when industry meets large targets. There can, hence, be some tweaking of numbers, and the priority will be on increasing capital expenditure to the extent feasible. The 2022-23 outlay was 6.5 trillion (excluding a 1 trillion transfer to states), which can be increased by not more than 10-15%.

The secondary part of the story is revenue. The fiscal deficit ratio will be defined by the GDP growth assumed, and it looks like 11-12% would be it. This will shape other assumptions made on line items, which get linked to the absolute nominal GDP figure of 305 trillion. Next year, two handicaps will be a lower real GDP growth number of 6-6.5% and lower inflation of 5.5%. The bounty of 2022-23 in India’s GST mop-up as well as corporate tax will not be replicated in 2023-24. Lower global commodity prices will also come in the way of customs collections. Hence, there is little space on the revenue front. If at all some populism has to be brought in, the government could consider lowering excise on fuels, probably in the beginning of 2024, to placate the electorate. Or oil marketing companies may be asked to trim their profits with crude remaining stable in global markets.

On the non-tax front, there would be some conundrums. The disinvestment target has not been met for several years and a more realistic number could be around 40,000 crore. Further, a surplus from the banking system will be hard to count on this time. The Reserve Bank of India (RBI) may not be able to transfer a larger amount, given that systemic liquidity was in surplus this year and RBI made higher interest payments to banks. Unless adjustments are made in the reserves to transfer funds, this part would require some working.

Markets would be interested in government borrowings, which New Delhi may keep within range so as to not spook rates as liquidity is already tight. Greater recourse to the National Social Security fund looks likely, to ensure that net market borrowings as a proportion of the fiscal deficit stays at around 67-70%.

All this means that while there will be several discussions on trade-offs and populist measures that will form the core of the budget, practically speaking, nothing significantly different is likely to materialize. Programme names can be changed or combined, or new schemes with low outlays announced, to create the necessary optics. There will be the standard achievements of the year laid out with some innovative acronyms for thrust areas in 2023-24. A target for farm credit is a necessity, while there could be a new theme taken up, like logistics was last year. It will be a prudent statement, with public money well spent. This we can reasonably expect and that is what matters at the end of the day.

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

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