Opinion N K Singh and Prachi Mishra write | Budget 2023: An eye on the future

It is responsive in terms of the priorities articulated in the vision for Amrit Kaal — opportunities for citizens with a focus on the youth, growth and job creation, and strong and stable macroeconomic environment; and the Saptarishi — seven priorities, which entail infrastructure and development, green growth, financial sector, inclusive development and reaching the last mile, to mention a few. These embrace all major stakeholders.

It is also responsible as it achieves the stipulated fiscal deficit of 6.4 per cent of GDP, and seeks a half percentage point correction — primarily from an unwinding of subsidies (food and fertiliser of 0.6 pp of GDP; likely reflecting both withdrawal of Covid-related relief and global commodity tailwinds). A rather laudable goal, especially amid elections, and given that it is rare across economies to withdraw spending programmes at any time; yet offset by an increase in much needed capital spending, and a continued decline in the ratio of revenue to capital spending. A modest nominal GDP and tax buoyancy, besides other parameters, gives room and flexibility.

That said, is the consolidation envisaged in the near- and medium-term enough? Ultimately, what matters for macroeconomic stability and growth are the overall fiscal deficit and liabilities of the sovereign. Notably, the budget aims for restraint on borrowings of CPSEs (1.2 per cent of GDP). Still, even excluding state PSEs for which we do not have reliable estimates, and allowing for some buffer in states’ estimates, consolidated deficit for the sovereign is running at ~10 per cent of GDP (5.9+3.4+1.2), and debt/GDP at ~85 per cent. This remains high in comparison with peer groups. Fortunately, there is acute awareness that the draft on revenues to service debts needs downward calibration. The Centre by itself spends more than 40 per cent of its revenues on servicing its debt burden, which is way higher than the average of 10 per cent across emerging markets.

The enhanced capex would surely have gainful multipliers; yet, executing an ambitious and credible path for fiscal and debt consolidation for the sovereign as envisaged in the medium-term statement too has positives. It enhances resources available for countercyclical fiscal policies in the event of negative shocks such as Covid, as well as for social spending in critical areas such as health and education where India’s public spending remains markedly low.

Indeed, continued reforms on tax policies and administration would be needed to close the potential revenue gap. Fortunately, there is a recognition that the unfinished agenda of GST reforms by way of slab rationalisation and moving towards a revenue neutral rate needs upward recalibration of 3 to 4 percentage points. While the rationalisation on direct taxes in reducing one slab is an effort in the right direction, over a period, the slabs need further rationalisation as also the elimination of wide-ranging exemptions. If greater fiscal room emerges, preference should be to revisit allocations in the areas of health, education, and green economy.

Does the budget sufficiently address issues in the neglected health and education sectors? With a hike of 2.7 per cent relative to what was originally budgeted in FY23, health expenditure is now assumed at Rs 88,956 crore. The 157 new nursing colleges will improve human resource capability and primary health centres. Other measures would be necessary to improve overall health outcomes. On education, given the need to improve outcomes, there is recognition that other initiatives are necessary. The enhanced allocation in school and higher education of Rs 68,804 and Rs 44,094 crore respectively, represents an increase of 8 per cent in both. This will be buttressed by improved outcomes through the National Digital Library, and revamp of teacher training, all in line with the overall vision for a digital economy.

Relatedly, the encouragement to states through Rs 1.3 lakh crore for capex as a 50-year loan, tantamount to a grant, along with the extra headroom for borrowing, should enable state governments to utilise these resources to improve growth and development outcomes, including in critical areas like health and education — state or concurrent subjects under the Seventh Schedule. It is somewhat ironic, though, that the states over the last two years did not utilise both the fiscal headroom given to them by the Finance Commission, as well as the additional resources made available for capex. In fact, the inability of states to undertake capex provided fiscal space to the central government. This is unfortunate because all state governments pleaded with the Finance Commissions for higher resources.

What does the budget do for India’s commitment for an orderly transition to a Green Economy? Does it position India well not only for the COP28 in the UAE but India’s presidency of the G20? The announcements included: Rs 35,000 crore allocation for energy transition and net-zero carbon emission targets; an annual production target of 5 MMT by 2030 for Green Hydrogen Mission; and a Green Credit Programme under the Environment (Protection) Act to incentivise sustainable actions. Issues of innovative financing, risk mitigation for crowding in private investments and securing participation of multilateral institutions would need continuing engagement.

Finally, an analysis of the budget cannot be complete without mention of agriculture and railways, both sectors crucial for employment and for the low- and middle-income population: A massive increase in targeted credit for high-growth, high-value agriculture; and a whopping increase in the capital outlay for railways, highest in a decade.

Overall, it is easier to plan for the unknown — not only known unknowns but unknown unknowns — by retaining a measure of flexibility and including contingency planning.

The panache of the Modi leadership, its confidence in continued political stability and an eye on the future is the fulcrum of all such balancing exercises. Finance ministers invariably seek instant gratification by somewhat over committing. Wisdom, however, lies in under-committing and over-performing, in promising less and letting outcomes be judged. Clearly, this budget has the stamp of this wisdom. It has been said, “We must not promise what we ought not, lest we be called on to perform what we cannot.”

NK Singh is Chairman, Fifteenth Finance Commission and President, Institute of Economic Growth. Prachi Mishra is Chief, Systemic Issues Division at the IMF. Views are personal and do not necessarily represent the views of the IMF, its Executive Board, or IMF management