This year’s budget will be presented today. Because it’s a new government and a coalition replacing a decade’s majority, public attention is focused on the economic policy signals the budget is likely to contain. Speculation has centred upon possible departures from the past, including those obliged by the coalition partners. Pressed by the recent election outcome in which unemployment and inflation emerged as major issues, there’s also conjecture about possible responses to these. Then there’s the lookout for fresh initiatives and novelties that have come to be attached to this annual event. How can we expect the government to balance competing pressures upon its financial resources and attain the key fiscal policy objectives, growth, and employment?
The most vocal segments — economists, analysts, financial sector and market participants, private corporates, the medium-small businesses, and several individual sections — have unequivocally expressed their views at different media forums and through direct engagement in the form of customary pre-budget consultations by the government. Households, which form the actual demand base and are directly impacted by fiscal policy, have no such avenue, of course. That job is left to economists who examine the economic cycle and the movements of its main constituents, investment and consumption, to shape perspectives and policy advice.
Much of these are in the public domain. Connecting the dots, a rough approximation would be a collective demand and advice for reviving consumption and employment. The former aggregate grew at half the rate of GDP last year (8.2%) or 4%; private final consumer expenditure also displays a longer trend of decline dating back to before the pandemic. Economists and analysts worry that this is becoming a drag on growth and investments now that the post-pandemic spurt in demand is waning, public expenditure is squeezed by compulsions of normalisation and repair, while private businesses still show no sign of investing afresh. Industry and businesses, especially fast-moving consumer goods’ firms, have fretted about poor sale volumes and high and complicated taxes, asking for stimulative measures and producer incentives.
Underneath the brisk growth of aggregate output are numerous high-frequency data and reports that collectively show wide disparities in demand, increased inequality, asymmetric recovery from the pandemic, high unemployment with worsening quality and increased vulnerability, falling financial savings of households with higher costs of living, a long-term shrinkage of unregistered enterprises that are typically self-owned, amongst other issues. These issues, especially unemployment, have suffused the public discourse in the past one month; threadbare analyses and discussions of different evidence have thus abounded.
With the spotlight on these, the popular expectation is a demand boost for consumption revival, respecting prudent limits so as to not rock the stable macro. Analysts believe there will not be a populist turn, or at least any such signal. Most expect a focus on social sector schemes, housing, the rural sections, job creation, with some accommodation of alliance partners' demands, motivated by the changed political economy; others include a continued commitment to privatisation and reform, infrastructure spending, specific job-creation measures and so on. Some, including this columnist, have reasoned that the fiscal policy, which has long depended on public capex to encourage private investments and growth, has been unable to turn around the persistent shortfall in consumer spending; this possibly requires rethinking and reorientation to include specific, additional support.
Therefore, it is reasonable to expect some form of boost to aggregate demand. The choice is between taxation (cuts) and spending (increases). The former would benefit only a small fraction of the population, would be inappropriate in the context of wide income inequality, deprive public revenues, and would be politically difficult to reverse. This perhaps tilts the choice towards increasing expenditure, although a mix with some rationalisation of personal income tax cannot be ruled out. Here, the infrastructure thrust or capital expenditure will remain intact but at a moderate pace — the interim budget projected this in line with nominal GDP growth over the previous budgeted amount. In this context, we must recall the announcement to build 30 million additional homes for rural and urban poor upon the formation of the new government, expressing its commitment to inclusive growth and social welfare.
However, any form of budgetary support to boost incomes — higher subsidies or direct cash transfers as part of extant welfare schemes — is bound to impact current or revenue expenditure, a not-so-desirable form of spending unlike capital expenditure, which augments productive capacity and stimulates investments and employment. February’s temporary budget projected a modest 3.2% growth in this component, sharply down in relation to GDP (~80-basis points). Therefore, increasing income support — higher payouts to farmers, the MGNREGA and so on — would directly increase revenue expenditure. Discretionary parts of this, for instance, subsidies on food, fuels, and fertilizers (nearly 8% of overall expenditure) are also likely to weigh more heavily as prices have increased since February.
A quarter per cent of total government expenditure services past debt or borrowings. Minus these interest payments, the primary revenue-expenditure gap is significantly enlarged at -1.5% of GDP, more than four times bigger than that five years ago (2018-19). Tax revenues have largely remained the same in proportion to national income, pointing to the precarity of public finances. After the pandemic, it’s now time to scale back spending, mobilise more resources, and rebuild buffers to be able to respond to future shocks.
Sometimes though, fortune smiles and gives governments a chance to balance pressures. Such is the case this time around. A fiscal windfall, a record Rs 2.11 trillion dividend from the Reserve Bank of India (0.64% of GDP), more than double the expected amount, could enable a please-all-segments budget. The government may reassure markets, analysts and investors by slightly overperforming on the 5.1% deficit projection, propose some measures for consumption revival while carving out portions to oblige different population segments, maintain the push to capex, some job-creation proposals or incentives and, possibly, special packages or support for coalition partner-states. While it may demonstrate its reform commitment, this may be through other means than privatisation announcements given the changed political economy dynamics.
Renu Kohli is an economist with the Centre for Social and Economic Progress, New Delhi