Budget: How Sitharaman smartly balanced economic stimulus with fiscal discipline

The biggest short-term priority is sustaining the post pandemic recovery in a year which is expected to be challenging due to global headwinds. India will face pressures on export demand, import costs and foreign investments. On the domestic front, while the economy has delivered two successive years of impressive growth (8.7% in FY22 and 7% in FY23), the coming year’s GDP growth could slow down to 6.5% as per the Economic Survey.

Domestic headwinds are high borrowing costs and insufficient private capex. It is obvious that the situation requires heavy lifting from the government, working with limited fiscal space.

It is in this backdrop that the budget has smartly balanced economic stimulus with fiscal discipline. The stimulus comes from a 33% increase in public investments covering roads, ports, airports and railways. The income tax rejig may also produce higher demand if people divert their tax saving towards spending. While both public investments and tax cuts have multiplier effects on the economy, the capex multiplier in India is around 2.5 while the tax multiplier is closer to 1. So, a one-rupee tax cut can provide only a one-rupee boost to GDP, while every rupee spent on capex will boost GDP by 2.5x. Viewed in this light, the government’s unwavering focus on capex is the right call. But such big bang spending needs money. Yet, the government has managed to bring down the estimated fiscal deficit from 6.4% in FY23 to 5.9% of GDP in FY24. Even more remarkable is the reduction in revenue deficit which signals a drastic improvement in the quality of the deficit. The revenue deficit shows the extent of government borrowing necessitated by short term expenses of running the government.

It has been estimated to come down by a humungous 22% in FY24, even while fiscal deficit will grow by 2% in absolute terms. This has been possible through some optimistic tax revenue projections and by slashing subsidies, mainly to food and fertilizers. MNREGA allocation is also lower but that is a demand driven scheme and the cut reflects a bet on rural recovery. It is heartening that the government has not frittered away these gains on freebies, but has chosen the path of fiscal consolidation.

A big disappointment though is the waning appetite for disinvestments. The target for FY24 at Rs. 51000 crore is 22% lower than the budget estimate of FY23 which itself was 63% lower than the FY22 target. Granted that in the current year so far, the government has managed to earn only Rs. 38671 crore out of the Rs. 65000 target implying that the FY23 budget estimate may have been ambitious.

But stiff targets can serve as pressure for officials to find the enthusiasm for letting go of public assets. Sadly, that is no longer the case. This point is important not just for the fiscal math, but the opportunity cost of lost efficiency in the economy due to the continued presence of public sector enterprises in non-strategic sectors.Turning to the long run challenges, India aims to become a global leader in the next decade and enhance living standards of the population. This will require substantial improvements in health, education, infrastructure and productivity.

The budget has checked all these boxes in good measure. Health and education expenditure have grown by 15% and 13% respectively. They include a hefty allocation for the flagship Ayushman Bharat scheme, establishing 157 new nursing colleges, and spending on teachers’ training and digital learning in line with the National Education Policy.

The productivity improvements include the infrastructure spending mentioned earlier along with emphasis on housing, green energy, digital technology and ease of doing business particularly for MSMEs. Their impact may not be instant, but these are the essential building blocks of long run prosperity.

(The author is Professor of Economics, Indian Institute of Management Kozhikode)