The government cannot spend even one rupee without permission from the people of India. That permission is given via the representatives in the Lok Sabha who pass budget proposals. But since a new Lok Sabha will be elected in a few months, the annual budget to be presented today will contain only unavoidable and inevitable expenditure plans, and an estimate of revenues. No major initiatives or fiscal adventures can be announced by the incumbent government as per convention. The incoming Parliament will have the prerogative to examine and pass a more detailed budget presented by the new government.
Even then some contours around this budget to be passed by a vote on account, can be ascertained. The big factor is about fiscal rectitude. Every annual budget is in deficit, which is met by fresh borrowing. That borrowing increases the already high debt mountain, and also increases the interest burden. Indeed, the single largest component of spending is interest on the accumulated debt, which this year alone is 11 trillion rupees. The debt to GDP ratio is about 82 percent presently. But the International Monetary Fund has warned that it could shoot up to 100 percent if we don’t watch our annual deficit.
The fiscal deficit for the present year is targeted to be nearly 18 trillion rupees. The saving grace is that we will not breach it, and the budgeted target will be met. That is thanks to a healthy tax collection especially direct taxes such as income tax and corporate tax. Combined with Goods and Services Tax (GST) the total tax collection this year could be 34 trillion rupees or 11.5 percent of GDP, the highest it has been in past fifteen years. The healthy tax collection could be due to higher incomes of the higher middle class (tax paying section of society) and higher profitability of companies. Interestingly the total national income (called nominal GDP) is going to be about 1.5 percent lower than what was anticipated. Hence the tax to GDP ratio is higher (with a lower denominator).
Fiscal restraint is needed, because higher deficits increase the interest burden, and are inflationary. Besides the government’s huge borrowing requirement (this year to the tune of 18 trillion rupees) sucks loanable funds out of the banks, and hence are not available to other borrowers. Eventually higher interest rates and an inflationary environment are detrimental to high growth, which is the major point of economic policy. The policies should promote high growth to be mainly driven by private enterprise, which then can generate healthy tax revenues to be used for welfare, health, education, pensions and the elderly. And also, for coping with climate change. Such a prudent fiscal stance will call for controlling the welfarist spending tendency of the government. Go easy on competitive welfarism.
India’s nominal GDP is about 300 trillion rupees and may rise to around 340 next year. The important thing is that this growth should be driven by higher consumer spending, more private capital spending (capex) and higher exports. It should not have to depend on aggressive government spending, given the severe fiscal constraints. Thankfully for the past three post pandemic years, India has been growing at around 7 percent in real terms, and even maintaining this pace over the next decade will be a big achievement if accompanied by fiscal restraint and a resurgent export growth.
Acknowledging fiscal constraints, the FM is unlikely to present a budget with a deficit of more than 5.5 percent of GDP (this year is 6 percent). She would do well not to tinker with income tax slabs, since the minimum income where tax becomes due is already 7.5 lakhs, which is more than three times the per capita income of the country. Expect a fiscally cautious budget, willing to bet on higher growth in the coming years that is driven mainly by the private sector.
(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press)