Budget 2023: How the finance ministry can kill many birds with one stone

The govt should shift all welfare spending into the capital spending account and call it an investment in social capital

A Business Standard report says: "The Union government could target a fiscal deficit of 5.8-6 per cent of nominal GDP for 2023-24, and it should continue its capital expenditure push and look to simplify the personal income tax regime, economists recommended Finance Minister Nirmala Sitharaman and her team during their pre-Budget interaction on Monday."

The report doesn't say what the economists said about how this was to be achieved if, simultaneously, welfare spending would also need to be increased in a pre-election year. The next general election is due in April-May 2024.

Some questions arise from this annual interaction, which started about 40 years ago. Originally, it was a genuine brainstorming session, but by the mid-1980s, it had become an unwelcome ritual for the ministry.

Apparently, the finance minister has already had eight pre-Budget consultations this year.

"More than 110 invitees representing seven stakeholder groups participated in these meetings… The stakeholder groups included representatives and experts from agriculture and agro-processing industry; industry, infrastructure & climate change; financial sector and capital markets; services and trade; social sector; trade unions and labour organisations; and economists."

But do these consultations serve any purpose? A finance minister once told me he used the time spent at these meetings to clear long pending files, slowly, one at a time. Everyone thought he was taking detailed notes.

I asked him why he didn't just take written submissions. He asked me, "Kaun padhega?" (Who will read). Then he added that it was a good PR exercise.

But that was more than three decades ago, and both the brainstorming and the PR aspect have long since become a thing of the past. These pre-Budget meetings that finance ministers hold with industry bodies (who also send in written submissions), economists and other noisy people like journalists outlived their usefulness in the mid-1990s, and they can be safely discontinued.

That said, the substantive question arising from this year's meeting with the economists remains: how can the government increase welfare and investment spending and simultaneously reduce the deficit?

The obvious answer is by increasing revenue. But that also leads to the obvious question, how? And more importantly, if revenue increases, how will it be distributed between investment and welfare? Which of these two will be the residual element?

Ideally, investment must get the lion's share, and welfare should get the residual amount. But since 1995, it's been the other way around. This was understandable when there were coalition governments. The proportion has varied slightly since then, but welfare has always trumped investment because it translates into votes. It's a major reason for the usual slow pace of growth of the Indian economy.

My solution to the problem of welfare versus investment is to shift welfare spending into the capital spending account, saying it is an investment in social capital. After all, better nutrition, health and education are as important as any physical stuff.

I remember once the government announced a 40 per cent increase in expenditure on agriculture by precisely this shuffling. If the traditional standards had measured the increase, it was less than 10 per cent. The beauty was that all the items counted under agriculture should have been there from the start.

This is not very hard to do, either. The finance ministry's budget division can achieve it quite easily, thus killing several birds with one stone. The economists will be happy. The minister will be happy. And the rest of the government will be satisfied, too, because, remember, this is the last Budget before her next general election.