BackMaximum government may well be here to stay
The budget’s huge outlays will stretch our pandemic fiscal expansion into next year’s election season. Given the risks of a sustained big-state policy, put it down to a political preference
PremiumThe hypothesis that politics invariably gets in the way of economics as national elections approach was put to a special test by the Union Budget for 2023-24, presented in Parliament by India’s finance minister Nirmala Sitharaman. It was billed as our first ‘Amrit Kaal’ budget, but its context had two big pattern-breakers. Unlike the usual half-decade cycle of a Lok Sabha term, with sarkari largesse kept for the final year, a pandemic had forced an early fiscal expansion that satisfied the original purpose of deficit spending—as a tool of economic revival and not a revdi dispenser—but also reduced space for the Centre to go on a pre-poll spree (without being reckless). This constraint, however, was accompanied by a political rarity: the Bharatiya Janata Party’s confidence in securing a third mandate on a trot in 2024. Together, these argued for the economy’s long-term interests to be held above the electoral fray. While this called for a markedly better balanced budget for post-pandemic stability, what we got was a cursory nod, with the state playing allocator-in-chief of capital.
Covid had pushed the Centre’s fiscal deficit to 9.2% of GDP in 2020-21. Although our annual gap between inflows and outgoes—likely to be 6.4% this year on an enlarged base after two lost years—is projected half a point lower at 5.9% of GDP for 2023-24, it still indicates an expense bloat. The state admittedly does have a worthy role in public welfare, climate action and other fields. Its proliferation of programmes, however, is not just populist, but given to grandeur in its role as an incubator of enterprise. Its infra splurge as an investor of last resort is set to take another leap. Its outlay on capital expenditure has been upped by a third to ₹10 trillion, or 3.3% of GDP. It is expected to boost growth, multiply incomes, perk up consumption, rouse ‘animal spirits’, ‘crowd in’ private investment and yield a revenue upsurge that’ll help tighten the fisc to 4.5% of GDP by 2025-26. This is plausible, granted, and it sure beats the profligacy of leaky outlays, but the pullback of this path is so slow that it transforms our covid-rescue plan into policy as usual. This plainly reveals a political preference, not just in how it privileges statist projects—industrial incentives included—over market orientation, but also how it downplays the patchy results so far of our crowd-in game. It’s an inclination that will pose risks as we go along. True, government debt is off its 90%-of-GDP pandemic peak, but our payback burden is a drag on fiscal efficacy, even as today’s uneven demand scenario masks price pressures that could flare up to make credit dearer and crowd out the efficiency of private enterprise.
A loose fisc for too long can cause instability, as we saw about a decade ago. The Narendra Modi administration that took charge in 2014 had pitched for “minimum government", with fiscal excesses to be minimized. Of course, it is within its rights to revise its strategy in favour of central plans. Growth does need some props, after all, and state-driven value generation has always had its advocates. Whether it’s our best way ahead is the question we must confront. And what about India’s fiscal responsibility law; is it still relevant? It has not been scrapped, but its escape hatch was exercised yet again: “The fiscal policy stance has been to make the domestic economy more resilient to exogenous shocks and to mitigate the risks of global economic downturn." Suitably reworded, though, a stance like this can be taken anytime—come health crisis or high voter visibility.
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