Given the economic survey’s baseline real GDP growth projection of 6.5%, the Union Budget assumes nominal GDP growth of 10.5% in 2023–24, implying a projected inflation rate of only 4%. How does this compare to previous governments’ figures?
According to the most recent economic survey, the Indian economy will grow by 7% in 2022-23, with both retail and wholesale inflation rates falling below 6% in the coming months. Given the economic survey’s baseline real GDP growth projection of 6.5%, the Union Budget presented in this context assumes nominal GDP growth of 10.5% in 2023-24, implying a projected inflation rate of only 4%. This reflects official optimism about the Indian economy remaining in a macroeconomic sweet spot of low inflation and high growth, even as the rest of the world experiences slowing growth and sticky inflation.
The economic survey predicts a new cycle of investment-led growth led by the private corporate sector, supported by increased credit from banks as they emerge from the bad loan overhang following an apparent clean-up of their balance sheets.
Rather than relying on such optimistic forecasts, the Finance Minister has announced a significant increase in capital expenditure in the Union Budget, with the goal of “crowding in” private investment, particularly in infrastructure sectors such as railways, roads, and power plants. Subsidies on food, fertiliser, petroleum, and interest subsidies, as well as outlays on welfare schemes such as the MGNREGA, on the other hand, have been significantly reduced, implying higher prices for cereals, LPG cylinders, and fertilisers such as urea in the coming days. The overall effect of such expenditure switching could be inflationary.
Total expenditure Tumbles
Table 1 provides a longer-term assessment of the Union Budgets, allowing us to compare the current government’s fiscal strategy in the post-pandemic period with the fiscal records of the UPA-II and NDA-I governments. As shown in Table 1, while total central government expenditure (annual average) fell from 15% of GDP during the UPA-II era to less than 13% during the NDA-I government’s tenure, the recession caused by the COVID-19 pandemic forced a significant increase in total expenditure to 17.7% and 16% of GDP, respectively, in 2020-21 and 2021-22. Total spending has fallen slightly since then, to around 15% of GDP.
While capital expenditure has increased significantly since 2020-21, exceeding the levels attained by the UPA-II and NDA-I regimes, food, fertiliser, and petroleum subsidies have been reduced beginning in 2021-22. Defence spending, which averaged 2% of GDP under the UPA-II government budgets and 1.6% of GDP under the NDA-I, has been reduced to 1.5% of GDP in 2022-23.
While agricultural expenditure appears to have increased as a percentage of GDP during the NDA-II government’s tenure, owing primarily to the PM-Kisan cash transfer scheme, education expenditure has decreased significantly when compared to the UPA-II era. Expenditure on rural development and health appears to have remained constant. The increase in capital expenditure is primarily concentrated in the transportation and energy sectors.
The Fiscal Situation
The government is forced to cut subsidies and welfare spending in order to increase capex on infrastructure due to insufficient revenues, which have remained the primary constraint on public spending. According to Table 1, gross tax revenues as a share of GDP barely increased from 10.2% during the UPA-II period to 10.8% during the NDA-I period before falling to around 10% during the first two years of the NDA-II government. Only in the post-pandemic period, from 2021-22, have gross tax revenues surpassed 11% of GDP.
Furthermore, corporate tax collection as a share of GDP fell from 3.7% of GDP under the UPA-II to 3.3% of GDP under the NDA-I, and fell further to 2.3% of GDP in 2020-21 following the drastic corporate tax cuts implemented in 2019. The post-pandemic recovery has resulted in increased tax collections, but corporate tax collections are expected to remain at 3.1% of GDP in 2022-23.
While corporate taxes have decreased as a share of GDP under the NDA rule, income taxes have gradually increased to reach 3% of GDP in 2022-23. Personal income tax revenues approaching corporate tax revenues point to a regressive taxation regime, which may have compelled the Finance Minister to make a few concessions to income tax payers in this year’s Budget. However, according to the Finance Minister’s speech, revenue foregone as a result of those concessions is projected to be only 35,000 crore, against income tax collections of 8,15,000 crore (RE) in 2022-23. Furthermore, the dual income tax regime with a plethora of slabs has overcomplicated the income tax structure.
The significant increase in indirect taxes is another regressive shift that has occurred in the taxation system under the NDA rule. While the share of customs duties in GDP fell from 1.6% during the UPA-II to 0.8% in 2022-23, the share of excise duties in GDP rose from 1.7% during the UPA-II (when GST was yet to be introduced) to 2% in 2020-21 and remained above 1.2% in 2022-23, in addition to the central government’s GST collections of more than 3% of GDP.
High excise duties on petroleum products continue to be levied, keeping fuel prices high. The rising share of income taxes in direct taxes, as well as the rising share of indirect taxes in GDP, have both contributed to the observed rise in income and consumption inequalities.
Because of the enhanced devolution formula recommended by the fourteenth finance commission, the states’ share of central taxes increased from 2.8% of GDP under the UPA-II to 3.7% of GDP under the NDA-I. However, under the NDA-II government, the states’ share of central taxes has fallen to an annual average of 3.4% of GDP. This is primarily due to the increasing prevalence of central government cesses and surcharges, which have reduced the divisible pool, denying the states more tax revenues.
The fiscal deficit had decreased from 5.4% of GDP under the UPA-II government to 3.7% under the NDA-I, owing primarily to spending cuts. However, the NDA-II government reversed the deflationary fiscal stance in 2019-20. In the face of the pandemic, the fiscal deficit peaked at 9.2% of GDP in 2020-21.
While the Finance Minister has set a “path of fiscal consolidation” with a target of reducing the deficit to less than 4.5% by 2025-26, the fiscal deficit targeted in the current Budget for 2023-24 is 5.9%. Without drastic expenditure cuts or a significant increase in revenue mobilisation, the NDA-II government is unlikely to meet the deficit target in two years. Meanwhile, the central government’s interest and debt repayment outlay, which had fallen from 3.2% of GDP under the UPA-II to 3.1% under the NDA-I, is set to rise to 3.6% of GDP in 2023-24. (BE).
In comparison to the G-20
Table 2 compares India’s public debt situation and fiscal balance (Centre and States combined) to the G-20 emerging market average. It is based on IMF estimates and projections. According to estimates, India’s public debt peaked at 89% of GDP in 2020, while the G-20 emerging market economies’ public debt continues to deteriorate and will surpass India’s gross public debt-to-GDP ratio by 2026.
Despite the fact that India’s government revenue-to-GDP ratio is significantly lower than the G-20 emerging market average, India’s public debt-to-GDP ratio is expected to outperform the G-20 emerging market average due to higher projected GDP growth. Such an expectation underpins the Union Budget’s vision of “Amrit Kaal,” a utopia of a perpetual macroeconomic sweet spot. If the projected GDP growth does not materialise, the macroeconomic situation, like the Adani conglomerate’s debt-equity ratio, can quickly become dystopic.
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