Budget and the growth process

Source: The post is based on the article “Budget and the growth process” published in Business Standard on 21^st February 2023.

Syllabus: GS 3 – Budgeting

Relevance: issues with the Budget 2023-24

News: The article discusses the shortcomings of Budget 2023-24.

What are the shortcomings of the Budget 2023-24?

Expenditure: The Budget Estimates (BE) of expenditure for 2023-24 show an increase of Rs 3.16 trillion over the Revised Estimates (RE) for 2022-23.

The increase in interest payments and the increase in loans and grants to states account for 76 percent of the expenditure.

Subsidies: A major reduction in expenditure has happened in subsidies. This has resulted in the sharp drop in the provision for food, fertilizer, and LPG subsidies.

The budget has increased in the outlays for SC and ST welfare, youth welfare, and the gender budget. These taken together form a 9.2 percent increase but it is below the capital outlay.

The budget has also decreased the outlay for rural employment guarantee programme which was the need for the inclusive development.

Capital outlay: The Budget shows the capital outlay as Rs 10 trillion.

However, if the equity contribution to public enterprises and grants and loans to states are excluded, the capital expenditure from the Budget would be lower by about Rs 2 trillion.

Further, if one includes the capital expenditure of central public enterprises, the total would be about Rs 11.5 trillion. This is about Rs 2 trillion more than the RE for FY23.

This gives a growth rate of about 20 percent rather than the 33 percent stated in the Budget papers.

Moreover, most of the capital outlay is on the transport sector with special focus on the railways. The Budget presents a 50 percent increase in the capital outlay on the Railways.

However, when we combine the Budget outlay and extra-budgetary resources (EBR) from public enterprises for railway development, the increase is 6 percent not 50 percent.

Household Savings and Private Investments: Capital outlay is largely funded by public borrowing which depends on net household financial savings. The increase in the public capital outlay has been one of the reasons behind low private investments.

Further, the post-liberalisation budgets of the Centre and the states have not created sufficient space for the flow of funds to the private sector.

This is because of the very slow growth in the tax/GDP ratio and the continuing rise in the public expenditure/GDP ratio.

Even though there has been a five-fold increase in real GDP between 1992-93 and 2019-20, the gap between the expenditure of the Centre and the states and the tax revenue of the Centre and the states remained around 14 percent of GDP.

This year’s Budget also does not show a sufficient reduction in the draft of the central and state governments on household savings.

Hence, private savings and the stimulation of the credit market for private investment must become a major target for fiscal policy.