Excellent Fiscal Restraint By FM

Excellent Fiscal Restraint By FM

The most remarkable thing about Finance Minister Nirmala Sitharaman’s budget proposal presented on February 1 is the fiscal restraint.

Ajit RanadeUpdated: Friday, February 02, 2024, 01:47 AM IST
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Interim Budget 2024 |

Since national elections are around the corner, the 2024 budget was supposed to be passed by a vote on account, which essentially meant that no special initiatives could be expected or inserted.

Even then, the incumbent ruling party could be tempted to pump in some fiscal fuel to charge up the economy on the eve of elections. This is not unheard of in India’s own electoral history. A famous quip by an American president, which resonates all over, has been, “it’s the economy, stupid”. Implicit in this is the belief that the voter always votes with economic interest in mind. That may not be wholly true of the Indian voter, yet the temptation of an incumbent government to provide fiscal expansion has always been there.

The most remarkable thing about Finance Minister Nirmala Sitharaman’s budget proposal presented on February 1 is the fiscal restraint.  The proposed expenditure is barely 6 percent more than last year. Of which the non-capex, i.e. revenue expenditure is barely up by 3.2 percent. This is the so called “non-productive” or routine expenditure and its growth has been sharply curtailed.

Two years ago, it grew at 8 percent.  Even the capital expenditure is budgeted to grow at 17 percent next year, much less than the rate of 31 percent growth per year seen for the past three years.

The FM reminded Parliament that the fiscal deficit target of 6 percent for this year had been met, indeed bettered to 5.8 percent of the GDP. That is good news for fiscal rectitude, although part of the success of a lower fiscal deficit ratio is because the denominator -- i.e. nominal GDP is -- at only 8.6 percent, lower than planned.

Next year’s target for the deficit is only 5.1 percent, even though the denominator, i.e. nominal GDP is projected to grow at 10.5 percent.  And the FM indicated that the following year in 2026 the deficit target will be lower than 4.5 percent. This is quite remarkable, and shows that fiscal restraint is indeed the main flavour of this budget.

The fact that the FM did not indulge in any fiscal adventure could mean two things, and both may be valid. Firstly, the ruling party does not need fiscal sops, especially from the budget to enhance its electoral prospects. Remember, during UPA-1, there was a substantial loan waiver announced about a year and half before the national elections. Secondly, the government now believes that growth cannot depend forever on fiscally supported capex by the public exchequer. This can have negative ramifications on the national debt.

The International Monetary Fund had recently warned that India’s debt to GDP ratio could shoot up to 100 percent. Of course, the government rebutted this dire prediction, saying that the debt ratio has actually come down from 88 to 82 percent post Covid. And that much of the debt is denominated in domestic currency not in dollars. But the point is that even at 82 percent the ratio is too high and is crowding out private investment and keeping interest rates high. Interest payment alone eats up nearly 40 percent of tax revenues. So, fiscal consolidation is an imperative. Fiscal restraint is needed, because higher deficits increase the interest burden, and are inflationary.

The borrowing requirement for next year is marginally lower than last year. Some of this is because the redemption of some bonds is being postponed. But it brought some good cheer to bond markets.  There is no change in tax slabs, which is welcome, since India already has an income tax slab structure that is an outlier in the world. We begin taxing only above 7.5 lakh annual income, which is nearly three times the per capita income of the country. The exemption limit is too high, and also the highest marginal tax rate kicks in too soon.

The speech of the FM presented major highlights and achievements of the government over the past ten years. The growth in infrastructure, in formalisation, in gross enrollment in higher education, in the founding of new institutions, are all impressive. The short economic report published on the eve of the budget speech had a special section devoted to explaining why the economy has become more resilient.  Indeed, if the growth of 7 percent continues in the next year wracked by geopolitical uncertainty and recessionary winds, it would be quite a remarkable achievement.

The longer-term sustainable growth requires consumption, private investment and exports to all do well. Each of these components in turn requires that the employment situation be robust, investment sentiment be positive and India’s competitiveness improve so that we make a bigger dent in the export market.  High growth is to be mainly driven by private enterprise, which then in turn can generate healthy tax revenues to be used for welfare, health, education, pensions and the elderly.  The economic policy stance needed to promote all this is well supported by the budget, in terms of its fiscal stance, and continuity of policies. Let us wait for the big bang reforms in the July budget.


(Dr. Ajit Ranade is a noted Pune-based economist) (Syndicate: The Billion Press) (email:
editor@thebillionpress.org)

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