Home / Opinion / Views /  Capex takes centre stage again in Sitharaman’s push for growth

Finance minister Nirmala Sitharaman has presented a pretty impressive budget for 2023-24. The budget seeks to increase the government’s capital expenditure while simultaneously reducing the fiscal deficit, continuing with consistency in the goal and strategy followed in the last couple of budgets. 

The sizeable push for capital expenditure on infrastructure development, particularly railways, is aimed at supporting long-term GDP growth recovery. The Rs. 10 trillion budgeted to be spent on capex in FY24 is 37% more than in FY23. 

The centrality of capex to the budget’s push for growth is more discernible when it is seen as a percentage of GDP. It is budgeted to go up from 2.7% of GDP in FY23 to 3.3% in FY24. The revenue expenditure of 79,000 crore budgeted for affordable housing over and above this should revive the construction sector, where the maximum number of non-formal wage jobs were created in the boom years in the United Progressive Alliance government’s tenure. 

The capex push is essentially the finance minister’s invitation to the private sector to resume investments, which is essential for sustainable GDP growth, job creation and reaping the demographic dividend. The private sector has held back for nearly a decade, even after corporate and bank balance sheets have healed from the debt excesses and demand destruction due to the global financial crisis, scams and policy paralysis in the UPA government’s tenure. Another reason the private sector has not been investing is that domestic demand has remained constrained during the Modi government’s tenure, including in the years preceding the pandemic. 

There’s been a fair bit of policy flip-flop and uncertainty. More recently, inflation has shrunk people’s spending power. By signalling continuity, consistency and credibility of the capex-pushing approach, the budget seeks to address all these concerns. There is also an invitation to the states to pitch in for repairing the India Growth Story. 

Nirmala Sitharaman has offered 50-year loans to states specifically for spending on capital expenditure within 2023-24. States will have the discretion to spend the sums as they like, but a part will be conditional on spending for the specific national objectives, including the scrapping of old government vehicles, urban planning reforms and actions, financing reforms in urban local bodies to make them creditworthy for municipal bonds, construction of housing for police personnel above or as part of police stations, and on the state’s share of capital expenditure of central schemes. 

Unlike Pranab Mukherjee’s reckless push for growth in the second UPA government’s tenure, even after providing a sizeable capex push, Sitharaman has budgeted a lower fiscal deficit for FY24. The budget estimates no slippages in the fiscal deficit from the target she set two years ago: 6.4% of GDP for FY23 and 5.9% for FY24. The budget reiterated the intention of taking the fiscal deficit to under 4.5% of GDP by FY26. The government’s debt burden is high, and the debt’s affordability is weak. 

The government borrows at nearly twice the cost that governments in advanced economies can borrow at. It’s, therefore, important that the government’s debt burden is quickly stabilized relative to nominal GDP. Or the sustainability of government debt will come into question, creating macroeconomic pressures. Interest repayments on government debt are projected to increase by 14.8% in FY24, on top of 16.8% this year. The debt policy seeks to gradually lower the public debt-to-GDP ratio in order to lower debt servicing costs and free up funds for other essential expenditures. 

The Central government debt was budgeted at 58.8% of GDP for FY22, but the revised estimates suggest it will be lower at 57% of GDP. Resisting the temptation for fiscal adventurism in a pre-election year, remaining committed to the fiscal reduction path announced two years ago, and instead opting for fiscal consolidation credibility will support the economy amid high inflation and a challenging global environment. 

Unlike many predecessors, P. Chidambaram’s last budget before the 2014 Lok Sabha election, for instance. Sitharaman’s fiscal math seems credible and devoid of creative numbers. Tax collections are estimated conservatively and projected to keep pace with GDP growth and inflation in FY24. GDP growth plus inflation, or nominal GDP growth, is assumed at 10.5%, a safe assumption, given the difficulty of predicting what new challenges, recessions, or slowdowns the global economy may pose. 

The tax collections may actually grow faster, as they have this year. Direct taxes have 23.5% in the first eight months of FY23. Indirect taxes have grown by 8.6%. Sticking with her trademark conservative approach on tax collection estimates, no change in revenues as a percentage of GDP in FY24 is budgeted from the 11.14% this year.

How has she budgeted for higher capital expenditure, then? 

With global fertilizer prices easing, savings on the subsidy bill are estimated at 0.7% of GDP in FY24 compared to FY23. The savings have been used to budget for the 0.7% of GDP higher capex. Savings adding up to about 0.5% of GDP are estimated on non-subsidy, non-interest repayments current expenditure. Those have been ploughed to meet the fiscal consolidation target. 

Disinvestment is budgeted to bring in Rs. 51,000 crore next year. This year, Rs. 60,000 crore is expected. Of which only Rs. 31,000 crore has come so far. The rest must come before 31 March. The disinvestment target, thus, looks a bit ambitious for a pre-election year, and PSUs may be called upon to pitch in with dividends. 

PSU dividends, including from the Reserve Bank of India (RBI), are budgeted at Rs. 48,000 crore in FY24 versus Rs. 41,000 crore in FY23. How will the fiscal deficit budgeted at Rs. 17.8 trillion be funded? The borrowing requirements are budgeted at Rs. 15.4 trillion, lower than what the market was expecting. This includes higher borrowings through the small savings route (Rs. 4.7 trillion in FY24 against Rs. 4.4 trillion in FY23). As the liquidity situation is quite tight presently for the banking system, the government will borrow more from small savers. 

For this, a new one-time small saving scheme for women has been announced. The maximum amount that can be deposited in the Senior Citizen Savings Scheme (SCSS) has been doubled to 30 lakh, and in the Monthly Income Account Scheme has been more than doubled to 9 lakh for a single account and 15 lakh for joint account. 

Many constraints hobble the making of a budget in any year, which have been intelligently tackled. Demands were made this year for tax breaks and big spending allocations to help households and businesses cope with high inflation and a difficult global economic situation. With elections season starting, giveaways must have been tempting. Then, the overall size of the budget itself is constrained in India by the relatively low tax-GDP ratio – something barring the odd finance minister, P. Chidambaram, during the first UPA government’s tenure, for instance, no one has succeeded in improving the ratio. 

To break free from the small size of the budget constrained in India by the relatively low tax-GDP ratio, Sitharaman has tried to widen the tax net by providing the incentives of lower rates if individual income taxpayers opt to give up exemptions. This calls for individual taxpayers to give up exemptions such as on housing rent and housing loans, which are long-term decisions. 

Revenue secretary Sanjay Malhotra said at a press conference after the budget was presented in Parliament that about half of the taxpayers have opted for the new regime, giving up on exemptions, and the number is expected to improve with the incentives announced in the budget. If true, this is a big taxation reform goal within reach. Once the bulk of the tax base has moved to the new regime, the next goal should be to lower the tax floor. At 7 lakh income per year, which is many times the per capita income, the tax base is bound to be narrow. Few countries have started collecting income tax floors at such high-income levels, leaving out the bulk of the population. 

The income tax incentives will also serve to provide some indexation of tax brackets with inflation, which has been high and eroding spending power. Will the more attractive tax rates stimulate consumption demand? Unlikely, the sums are likely to be too meagre. It’s more of a relief for high inflation. Other initiatives to widen the tax net may also begin to show results in time, especially the use of technology for making tax return filing convenient and tax evasion and avoidance difficult. 

The tax system, Sitharaman said in her speech, processed more than 65 million returns this year. The average processing period has reduced from 93 days in FY14 to 16 days. Remarkably, 45% of the returns were processed within 24 hours. 

The speech had the usual sprinkling of traditional-sounding catchwords – amrit kal, amrit dharohar, amrit peedhi, shree anna, saptarishi, panchamrit, PM-pranam, mishti – and new schemes. The PM Vishwakarma Kaushal Samman (PM VIKAS) is aimed at traditional artisans and craftspeople who work with their hands using tools. Assistance, including financial support and social security, to help improve the quality, scale and reach of their products and integrate them with the MSME value chain was announced. 

There were announcements also for tapping the large jobs-creation potential in tourism. While schemes aimed at protecting the incomes of the vulnerable and promoting job creation can’t be criticized, if the delivery mechanisms can be sorted out, the initiatives could prove helpful. However, the superior way is to take the markets approach rather than the government schemes approach. For that, investing in human capital and reducing barriers to doing business will have to be the principal policy goals.

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