The need of the hour for the government would be to tighten its fiscal belt, recommends A K Bhattacharya.
The finance ministry has begun the exercise for preparing the Union Budget for 2023-2024.
To be presented on February 1, 2023, this would be the last full Budget of the Modi government in its second term.
This is because, in the normal course, the next general elections should be held in April-May 2024.
Naturally, therefore, there is a general expectation that Finance Minister Nirmala Sitharaman’s fifth and final Budget of this government would be a pre-election exercise.
There are, however, good reasons why the finance minister should not allow it to be a pre-election Budget.
Not because giveaways in a Budget do not yield political dividends for the ruling party.
Voters do remember what the government rolls out by way of concessions and reliefs for them in the Budget and those surely influence their electoral choices.
The problem is voters have short memories.
What is done to woo them in February 2023 is likely to be forgotten by the time general elections are held, more than a year later, in April-May 2024.
Hence, the political benefits of making Budget 2023 a pre-election exercise would be suboptimal.
What may, however, work well for the ruling party would be to announce relief and concession packages for the people a couple of months before the elections are held.
Voters are likely to remember them when they enter the election booth, and the ruling party is more likely to gain from such giveaways.
Perhaps keeping that in mind, the Modi government in its first term did something similar, even though it raised several eyebrows.
In the interim Budget presented in February 2019 by then finance minister Piyush Goyal, the government announced the assured income support scheme for farmers called PM-Kisan with an annual outgo of Rs 75,000 crore (Rs 750 billion).
In addition, Goyal made an important tax policy change by announcing full tax rebate for individual taxpayers with a taxable annual income of up to Rs 500,000, which implied a benefit of Rs 18,500 crore (Rs 185 billion) to be enjoyed by over 30 million taxpayers.
It is reasonable to assume that among many other factors benefitting the Bharatiya Janata Party in the 2019 elections, the PM-Kisan scheme and the income-tax concessions played a significant role in securing electoral dividends for the ruling party.
Of course, purists have justifiably expressed serious reservations about the idea of an interim Budget announcing schemes that entail such financial expenditure.
A government going in for elections in a few weeks should not be making announcements on either expenditure or on tax concessions through an interim Budget.
Earlier, in 2014, the interim Budget did announce tax concessions, but these were for indirect taxes for consumer durable items. But 2019 saw, for the first time, an interim Budget announcing direct tax reliefs.
This is not to suggest that the government should once again tinker with the spirit of an interim Budget in 2024.
If at all, it can consider announcing some policies and schemes to win the voters before the elections, but which are not part of the interim Budget exercise.
The advantage would be that the burden of additional financial outlays would have to be borne a year later, allowing the government to effect the much-needed fiscal corrections in 2023-2024.
The short point is, there is no compelling political and electoral logic in making the Budget for 2023-2024 replete with schemes with substantial expenditure outlays and concessions resulting in revenue outgo and, thereby, throwing to wind the much-needed fiscal caution and prudence
On the contrary, the need of the hour for the government would be to tighten its fiscal belt.
Remember that the finance minister had set for the Centre a fiscal reduction plan to be achieved over a longer period, while the states are under an obligation, set by the Fifteenth Finance Commission, to achieve fiscal correction at a faster pace.
Accordingly, the Centre’s fiscal deficit is set to be brought down to 4.5 per cent by 2025-2026, while the states should bring theirs down to 3 per cent by 2023-2024.
Even though the states have a tougher target, the data on the revised estimates for 18 major states for 2021-2022 show that their combined fiscal deficit would be about 3.4 per cent and is budgeted to decline to only 3.3 per cent in 2022-2023.
Achieving the 3 per cent fiscal deficit target for the states in 2023-2024 looks difficult, although not entirely impossible.
The Centre, on the other hand, brought down its fiscal deficit from 9.2 per cent of GDP in 2020-2021 to 6.7 per cent in 2021-2022 and is likely to bring it down to 6.4 per cent in 2022-2023.
Achieving a further deficit reduction of about two percentage points in the next three years would be difficult if the finance ministry treats the Budget for 2023-2024 as a pre-election exercise.
Equally important, the economic headwinds India faces now are so strong that it would be necessary for the coming Budget to keep government finances firmly anchored to the path of fiscal consolidation already promised by the finance minister.
Indeed, the government should be prepared to face the consequences of a global economic slowdown, the adverse impact on India’s exports and the outflow of foreign portfolio investments, all of which would exert further pressure on its external account.
The need for raising interest rates to keep inflation under control and prevent any further depletion of reserves would also imply a moderation in the growth assumptions.
Ensuring financial stability will clearly be a preferred goal than the pursuit of higher growth through increased spending that widens the deficit even further.
The last two financial years have seen the combined government deficit to stay in double digits.
In 2022-2023, the combined deficit may still be around 10 per cent.
Such high levels of deficit for three years running would be unparalleled.
The economic consequences of such an excess could also be unparalleled.
The Union Budget for 2023-2024 should be mindful of that and reprioritise its expenditure to achieve a faster reduction in its fiscal deficit, before electoral compulsions make things difficult in 2024.
Feature Presentation: Rajesh Alva/Rediff.com
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