Lessons in budgeting: Changing Budget tack amid changing realities

Source– The post is based on the article “Lessons in budgeting: Changing Budget tack amid changing realities” published in the Business Standard on 17th December 2022.

Syllabus: GS3- Indian economy and mobilisation of resources

Relevance– Issues related to government budgeting

News– The article explains the trends of the budget approach by the current finance minister. It also explains the current economic scenario.

What has been the trend of the budget approach by the current finance minister?

There is a change in her approach to budgeting. It had a somewhat adventurous beginning in 2019. Now it is notable for growing realism.

In 2019, tax revenue fell short by a sharp 18.4%, because of economic slowdown and unprecedented cut in corporate tax rates.This year reported a fiscal deficit of 4.6%. It was up significantly from the originally budgeted 3.4%.

The next year GDP shrank due to the full impact of Covid. Corporation tax revenue shrank by 17.8%, while collections from GST dropped by 8.3%. The finance minister decided to end the wholesale fudging of fiscal-deficit numbers that had been going on. Bringing off-balance sheet borrowing into the government’s books doubled the deficit to a record 9.2%.

In her third Budget, Ms Sitharaman signalled that she had realised the folly of budgeting over-reach. She projected only modest revenue numbers for 2021-22. Actual collections overshot the original projections by 13.4%. The year ended with a deficit that was more or less the same as originally projected.

This year is headed for a repeat of that performance. Tax revenue is running well ahead of projections. But on the expenditure side the subsidy outlay increased once again because of the impacts of the Ukraine war and continuous free supply of foodgrains.

What is the current assessment of economic condition and scope for budgeting?

The corporation tax rates now match international benchmarks. Income tax rates are at an optimal level. But the multiplicity of capital gains tax rates remains.This is the same for GST.

Fiscal deficit remains far too high. Bringing it down is a big challenge. Government needs to provide bigger Budgets for defence, education and health care.

India’s Budgets are too small for the demands being made on its governments. So there is really no escape from cutting the subsidies. That should lower the deficit to below 6% of GDP.

The additional outlays needed would therefore need to be financed by fresh revenue, possibly by raising the average GST level simultaneously with a convergence of rates.