ExplainSpeaking | Budget 2023-24: Economic growth, fiscal health and unemployment

The Union Budget for the next financial year (2023-24 or FY24) has been announced and chances are you would have read a lot about it. Perhaps, too much. So here’s an attempt to focus on the key metrics that will likely be the fundamental drivers behind the news flow for the coming financial year.

Economic growth

The Union Budget assumes that India’s nominal GDP will grow by 10.5% in 2023-24. That means the overall market value of the final (not intermediate) goods and services produced in India during 2023-24 will be 10.5% higher than the market value of India’s GDP in the current financial year (2022-23).

By definition, this market value includes the role of inflation.

Let’s understand this by looking at what is likely to happen in the current financial year’s GDP.

In FY23, the nominal GDP growth is 15.4%. But the real GDP growth is expected to be close to 7%.The difference (8.4%) is the effect of price inflation.

So, if one wants to know what is the likely “real” GDP growth in the coming year then one would have to subtract the rate of inflation from 10.5%, which is assumed to be the nominal growth.

If one presumes that inflation will be 4% — as is the RBI’s targeted level — then the real GDP growth will be 6.5%. But, most experts expect inflation to be higher than that.

If inflation remains even slightly elevated, say 5%, then real GDP growth will fall to 5.5%.

But high inflation is not the only threat to growth.

What if the nominal GDP itself doesn’t grow by 10.5%? For instance, in one of the Budget briefings Nomura Research expects nominal GDP growth to be between 8.5% and 9%. In such a scenario, real GDP growth may end up closer to 5% than 6%.

The rate of real GDP growth is the growth rate that actually matters for real issues such as job creation and poverty reduction. That’s because nominal growth can often spike just because of a spike in prices — a case in point is the current financial year which is expected to witness a handsome 15.4% nominal growth.

Fiscal deficit

The government’s financial health is a very important driver of the economy. A government that borrows too much and for the wrong kind of expenditure not only wastes money in a capital-scarce country such as India but also holds back private enterprises by raising borrowing costs.

On the face of it, the Budget shows that the government will meet its fiscal deficit target (6.4% of GDP) for the current financial year and continue to reduce it to 5.9% (of GDP) in FY24.

However, as pointed out in last week’s ExplainSpeaking, fiscal deficit performance should be read along with the revenue deficit achievements. When one looks at both metrics together, the picture changes.

To be sure, the fiscal deficit is reflective of the total borrowing requirement of the government. Revenue deficit refers to the excess of revenue (read everyday) expenditure over revenue (read everyday) receipts. If the government keeps the revenue deficit to zero then all its market borrowings (fiscal deficit) can go towards capital expenditure (or spending that increases the productive capacity of the economy).

Let’s keep aside the budget estimates for FY24 since those are just promises or announcements. Let’s first look at the revised estimates data for FY23 to understand how the government fared on fiscal prudence in the current financial year.

Reading the “Budget at a glance” document (page 1), it becomes clear that when the Budget for the current financial year was presented last year, the government hoped to reduce the revenue deficit from 4.4% (of GDP) in FY22 to 3.8% in FY23. The revised estimates, however, show that the revenue deficit is 4.1% for FY23.

Now, given the fact that the overall fiscal deficit is maintained at 6.4% level in FY23, a higher than the budgeted revenue deficit implies that the government used a higher than the budgeted amount of its borrowings from the market on meeting its daily expenses (instead of using it for capital expenditure).

Revised estimates also show that while the capital expenditure by the government in FY23 was 23% more than the FY22 levels, it was 3% less than the budgeted amount.

This should provide some context for reading the budget targets for revenue deficit (2.9% of GDP) and fiscal deficit (5.9%) in FY24.

Revenue deficit

Whether or not the government will be able to achieve the rather sharp decline in revenue deficit depends on two factors: the assumptions it has for the growth in revenue receipts and the growth in revenue expenditure.

Again, a look at the trend in FY23 suggests that the assumptions may be optimistic.

In the current financial year, revenue receipts (this includes both tax revenues such as income tax, corporate tax, and GST etc. as well as non-tax revenues such as dividends from public sector undertakings) grew by 8.2% over FY22. For FY24, the government hopes the revenue receipts will grow by 12% over the revised estimates of FY23.

ie_content_priority_driven exkeyword=”Best, Explained” link=”https://indianexpres.scom/section/explained/” hlabel=”Best of Explained” hlink=”https://indianexpress.com/section/explained/” pid=”6372640″ mlabel=”Click here for more” mlink=”https://indianexpress.com/about/express-explained/”%5D

On the revenue expenditure side, the revised estimates grew by 8% over FY22 and the government hopes that in FY24, they will go up just 1.7% over the FY23 number.

In other words, in FY24, the government hopes revenue receipts will rise faster than what it did in FY23 while revenue expenditure would largely stall.

It is on this basis that it hopes to achieve a sharp reduction in revenue deficit.

Unemployment

The word “unemployment” was, as the cliche goes, conspicuous by its absence in the Budget speech. This is quite remarkable because India has considerable labour stress and it can become a political issue.

Sample the following startling statistic: The total number of employed people in India at the end of December 2022 was lower than the total number of employed people at the start of 2016.

There were 404.5 million Indians with a job, according to the national unemployment profile of January-April 2016 of Centre for Monitoring Indian Economy (CMIE). At that time the total working-age population (that is Indians above the age of 15 years) was 944 million.

At the end of December 2022, the total number of employed people was 404.1 million even as the working age population has grown to 1105 million.

In other words, the past 7 years (between the start of 2016 and the end of 2022), the absolute number of Indians with jobs had gone down by 4 lakhs even as the number of Indians in the working-age population had gone up by over 16 crore.

In other words, India’s “employment rate” — the total number of employed people as a percentage of the working-age population — has had a steady fall from 42.8% in 2016 to 36.5% in 2022.

The employment rate is a better metric to judge the labour market stress than unemployment rate (number of unemployed as a percentage of the labour force) because India’s labour force itself is shrinking as an increasing number of Indians get dismayed from not getting a job and stop demanding work. It is a lot like the criticism one hears about MGNREGA: Low budget allocations lead to delays in payment of wages/ non-payment of wages and that overtime leads to people opting out of demanding work; the reduced demand then becomes an argument for further cutting back the budget allocation, so on and so forth.

Lastly, the reason for looking at CMIE data is that it has the most updated national database for unemployment. The government’s official source — the periodic labour force participation survey (PLFS) — comes with a lag of at least a year. Although it is true, as CMIE CEO Mahesh Vyas again clarified recently in an opinion piece in The Indian Express:“…CMIE uses a different definition of employment. It eschews the rather relaxed definition in the official system of classifying a person as employed if such a person was employed for even just one hour in a seven-day reference period, to the exclusion of all other statuses during the same week. CMIE…considers a person to be employed if such a person is employed for a better part of a day.”

Will the Union Budget create enough new jobs to alleviate the stress in the labour market? Will India’s real GDP growth rate fall below 6% in FY24? Will the government be able to raise enough revenues to improve its fiscal health?

Share your views and queries with me at udit.misra@expressindia.com

Until next week,

Udit