Prudence first

Interim Budget sticks to fiscal glide path

In an election year, the Union government is supposed to present merely a vote-on-account on February 1; major policy proposals and tax changes are postponed until July, under a new administration with a fresh mandate. However, the vote-on-account has over time morphed into a grander “Interim Budget” that can bend, if not break, the convention preventing electioneering through Budget proposals. This year, however, in a welcome return to transparency and convention, the Interim Budget stuck to the essentials: Presentation of the last year’s performance, and conservative allotments for the coming year. There were no grand giveaways, no conspicuous welfarism, no populist posturing through tax tweaks. If anything, this reveals the confidence with which the government views its prospects in the coming election. Clearly, it believes that no last-minute boosts to its economic record need to be planned.
 

Union Finance Minister Nirmala Sitharaman and her team in the ministry also need to be commended for the transparency of the Budget figures. The schedule recording off-Budget borrowing was empty this year, a pleasant change from some past years. The deficit numbers, therefore, will be viewed as trustworthy. Together with the restoration of the vote-on-account convention, this is a compliment to the budgetary ethics of the current ministry. For the equity markets, which ended the day just about where they started, this may count as a non-event — but a non-event is precisely how a vote-on-account should feel. That said, there are important points buried in the Budget mathematics that provide a sense of the government’s expectations over the coming year.
 

Its commitment to the fiscal consolidation glide path comes through in the macro numbers. This year, the target of 5.9 per cent of gross domestic product (GDP) was beaten, with 5.8 per cent being achieved through a combination of higher non-tax revenue through dividends from nationalised banks and the Reserve Bank of India, and a small squeeze on capital expenditure. Next year’s target, of 5.1 per cent of GDP, will be achieved according to the Budget through relatively modest efforts on the revenue side. Gross tax revenues to achieve this deficit target have been projected to grow with a buoyancy of only 1.1, considerably lower than was on display this year.
 

The tendency towards restraint and responsibility in this Budget is reflected also in its approach to state finances. As our columnist Akash Prakash points out, half the positive revenue surprise this year has been transferred to the states. As a consequence, the overall net tax revenue accruing to the Union government has not seen the forecasted bump over the estimates in Budget 2023. That said, there are aspects of the global scenario that do not seem to have sufficiently informed the Budget’s thinking, and could over the course of the coming year severely undermine its commitment to control spending.
 

First, there is the possible under-provision for subsidies. The urea subsidy, for example, is due to go down by 9 per cent or so in the coming year compared to the Revised Estimates for 2023-24. The petroleum subsidy, though much lower now, is also supposed to decline. Built into this is a certain sanguine approach to the possible path of oil and gas prices in the medium term. Chaos in West Asia is a non-zero possibility, given the multiple fronts on which violence has broken out in recent months. It is not wise to be overconfident about oil and gas prices.
 

Second, the defence budget seems to be disconnected from global threats in both the short and the long terms. The allotment for defence has been marginally decreased in the coming year, which means of course that in real terms there will be a marked fall in the defence budget. While defence capital expenditure may nevertheless marginally increase, it is clear that the government must re-examine its long-term approach to the financing of India’s military. Salaries and especially pensions cannot be allowed to eat away into the space for big capital improvements for ever, especially if real expenditure on the military is stagnant or decreasing.
 

Third, the global tendency towards high-subsidy industrial policy has not been sufficiently answered in New Delhi except through rhetoric. Although multiple production-linked incentive (PLI) schemes have been announced, including for emerging and frontier technologies that are crucial to future growth and to economic security, the actual budgetary allotment for the PLI programmes does not match the promises in press releases. The downside risk to the fisc if the government is forced to scale up PLI spending as part of a global subsidy race to the bottom should not be ignored.
 

Overall, however, Ms Sitharaman has been judicious in how she plans for the future. Reading between the lines, it is easy to detect that the government views its chances of presenting a full Budget later this year as a certainty. The effects of the pandemic on spending and the deficit, which were an obstacle in the government’s approach to fiscal responsibility, are clearly fading. But, equally, Prime Minister Narendra Modi’s second-term economic approach, which relied on funnelling ever more money to government capex — particularly in transport — is reaching the limits of its usefulness. An increase of only 17 per cent to capex was promised for the coming year. Broader plans for the coming five years will now have to be presented, as is appropriate, in July.