March , 2023
Budget 2023-24: FM stakes on infra sector to push up growth but rising revenue spent threatens to upset fiscal balance
11:28 am

Tushar K. Mahanti

Budget 2022-23 has been widely hailed for achieving what appeared a difficult exercise considering the uncertain macroeconomic development both at home and abroad. Sitharaman has increased capital spending by a whopping 33% while reducing individual income tax rates and estimating a lower fiscal deficit.

Given that nine state elections are due this year, followed by a general election next year, speculation was ripe that the country would get an election Budget full of giveaways that would threaten long-term finances. But this has not happened. FM has tried to balance growth with fiscal stability.

In line with the government’s ambitious economic agenda, the Budget focuses on three key aspects- first, to provide opportunities to citizens, second, to provide a strong impetus to growth and finally, to strengthen macro-economic stability. Among the many priority areas outlined in the budget, agriculture and infrastructure are keys. There is a sustained push towards building of digital public infrastructure in agriculture, strengthening credit to farmers and promotion of the cooperative sector.

Like in the past years the government considers infrastructure development as a driver of growth and employment. This is reflected in record capital outlays this year, which saw a 33% increase to reach `10 lakh crore. There is also a focus on enhancing private investment in this sector. The capital outlays for the railways too have increased substantially over the years to support the government’s increasing efforts to improve the road transport network.

Medium, small and micro enterprises (MSMEs), considered as the multiplier of employment and the supply source of the manufacturing sector, is another area where the Budget makes strong policy interventions. In addition to enhanced funding for credit guarantees for this sector, the Government also proposes to return 95% of sums forfeited due to non-execution of contracts by MSMEs. A scheme to settle contractual disputes with graded settlement terms is also on the cards.

Infrastructure push

Over the years, higher capital investment and infrastructure development have been at the core of the government’s growth initiative. FM has announced a huge increase in capital outlay, which works out to about 3.3% of the GDP.

In her Budget speech, FM said that the newly set up infrastructure finance secretariat will assist in attracting more private investment. The new allocation is higher than the `7.5 lakh crore budgeted for the previous year and the highest on record. In the previous budget, the capital expenditure saw an increase of more than 2.2 times the expenditure of 2019-20 and was 2.9% of GDP in 2022-23.

“This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds,” Sitharaman said in her speech. The direct capital investment by the Centre is complemented by the provision made for the creation of capital assets through Grants-in-Aid to States. The ‘Effective Capital Expenditure’ of the Centre is budgeted at `13.7 lakh crore, which will be 4.5% of GDP, FM has estimated.

The government’s policy to make infrastructure development as the key to growth is clearly seen in the geometric progression of capex spending.  In just four years, between 2019-20 and Budget estimates for 2023-24, the expenditure on capital account has gone up by three times from Rs 3.35 lakh crore to `10 lakh crore. As the government rolls out mega infrastructure projects the demand will pick up across the sectors. The infra push will lead to an increase in demand for steel, cement, railway wagons, auto products like trucks and tractors leading to a multiplier effect on employment and income.

In fact, the RBI in its ‘State of the Economy’ report published in early February said that the Union Budget’s measures, if implemented, could raise potential growth from 6% estimated by the IMF in 2022-24 to 6.8%. The report also says that the Budget could push FY24 growth to 7%.

Fiscal consolidation

The financial health of the government is a crucial driver of growth. A government that borrows for unproductive expenditure not only wastes money but also affects the private sector’s finances by raising borrowing costs. The Budget shows that the government will meet its fiscal deficit target (6.4% of GDP) for the current financial year and will reduce it to 5.9% (of GDP) in 2023-24.

However, the fiscal deficit performance should be read along with the revenue deficit achievements. But if one looks at both these metrics together the equation changes. Understandably, the fiscal deficit is reflective of the total borrowing requirement of the government. Revenue deficit refers to the excess of revenue expenditure over revenue receipts. If the government keeps the revenue deficit to zero then all its market borrowings can go towards capital expenditure or spending that increases the productive capacity of the economy.

In 2022-23 Budget FM hoped to reduce the revenue deficit from 4.4% of GDP in 2021-22 to 3.8% in 22-23. The revised estimates, however, show that the revenue deficit is 4.1% for 2022-23. Given the fact that the overall fiscal deficit is maintained at 6.4% level in 2022-23, 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 revenue expenses. Revised estimates also show that the capital expenditure in 2022-23 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 to 5.9% in 2022-24.

Rising interest liabilities eating into govt finances

The government has proposed to bring down the revenue deficit from 4.1% in the revised estimates of 4.1% for 2022-23 to 2.9% in 2023-24. Whether or not the government will be able to achieve the rather sharp cut in revenue deficit depends on two factors: the assumptions it has for the growth in revenue receipts and the growth in revenue expenditure.

The government has estimated an increase of over 12% revenue receipts. This seems rather optimistic against an increase of 8% last year. On the other hand, most of the revenue expenditures are the responsibilities of the government and any pruning there is difficult.

Take for example, the case of rising interest burden. With the burden of past borrowing is showing up in an unspectacular but inexorable rise in interest payments that are eating into resources of the government which could otherwise be spent on infrastructure, social sectors, and other ‘public goods. For example, adjusted for inflation the outlays for mid-day meals and integrated child development are down by 43% and 40% respectively since 2014-15. Nearly a third of the centre's budgetary expenditure now goes to pay for interest obligations and the share is rising.   

Agriculture is redefined

If the FM has pushed infra spent to achieve higher economic growth, she has likewise taken measures to revitalise and modernise agriculture. The Budget provided higher impetus on regenerative agriculture, inclusive growth, improved access to agriculture credit and better-quality agriculture inputs, digitization and technological development.

The importance of agriculture was a testimony during the Covid-19 days. While bumper stocks allowed the government to distribute foodgrains free or at subsidised prices to distressed millions, higher farm sector growth had helped the economy from falling down further. India's foodgrains production rose more than six times in seven decades from 50.82 million tonnes in 1950-51 to 315.72 million tonnes in 2021-22.

This is important as the world at large is feared to face food shortage in 2023. According to the Global Report on Food Crisis 2022 Mid-year Update of World Food Programme up to 205 million people are expected to face acute food insecurity and to be in need of urgent assistance in 45 countries. This is the highest number recorded in the seven-year history of the report. According to the external ministry India is exporting wheat to about 23 needy countries right now.

The Union Budget 2023-24 made a slew of announcements for farmers and the agricultural sector, ranging from setting up an agri-tech start-up fund and hiking agricultural lending to promoting alternative fertilisers. The allotment to the Ministry of Agriculture and Farmers Welfare increased by 4.6% to `1.15 lakh crore in 2023-24 Budget against `1.10 lakh crore in 2022-23. Agriculture credit target has been increased to `20 lakh crore with focus on animal husbandry, dairy, and fisheries. FM has initiated an agriculture accelerator fund that would promote start-ups in ag-tech enterprises which in turn, will help increase yield and productivity on the supply side while also enhancing price realisation for the farmer on the demand side through more efficient market linkages. FM has also announced the setting up of 10,000 Bhartiya Prakritik Kheti Bio-Input Resource Centres over the next three years for natural farming.

Education gets highest ever allocation

Education gets a long space in FM’s Budget speech; she mentioned a whole lot of things including nursing colleges, medical research, pharma innovation, teachers training and digital library in her speech. The Budget has allocated `1.12 lakh crore for education – the highest ever and an increase of around 8.2% compared with 2022-23.

The government proposes to re-envision teachers’ training and develop institutes of excellence at district levels, and set up a national digital library to make available quality books across subjects to children and youngsters to help them overcome the learning losses suffered during the Covid-19 pandemic.

The Union education minister lauded the Budget and said that “by giving a boost to education, skill development, entrepreneurship, research and development, digital infrastructure, green growth and job creation, the Budget draws a meticulous blueprint for India and lays a solid foundation for transforming India into a technology-driven knowledge-based economy.”

Maybe, the education sector got the highest ever allocation in 2023-24, but the question is: Will that be enough to fulfil the promises made in the National Education Policy (NEP), 2020? For, even after the rise in allocation, the amount seems to be far lower than what is needed to implement the NEP 2020. The Economic Survey 2022-23 shows that while student enrolment is higher, school-level infrastructure is better and there are more teachers to boot, the total expenditure, states and Centre combined, on education as a percentage of GDP had stayed stagnant at 2.9% since 2019 and is only marginally up from 2.8% in FY16. To note, the NEP recommended public investment on education at 6% of GDP. India has not reached even half that mark.

The missing link

Surprisingly, while FM talked of growth, infra push, education or agriculture in her budget speech, the word ‘unemployment’ was conspicuous by its absence in her speech. This is striking that while India has a significant labour stress and unemployment is a major issue, it did not get even mentioned in the Budget speech.

Look at the figures: 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. That is, 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.

FM may not have mentioned the word ‘unemployment’ in her speech, but the question is: Will higher allocation on infrastructure in the Budget create enough new jobs to alleviate the stress in the labour market?


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