Express press service
Annual budgets aim to balance income and expenditure. But Bob is not your uncle if you happen to be India’s finance minister and what is supposed to be a simple arithmetic exercise will be anything but.
For Finance Minister Nirmala Sitharaman, the problem is even more complex as she presents her fourth budget next Tuesday. It is also India’s second pandemic budget and with the economic recovery playing hopscotch, one would expect the government to walk the nine yards to tackle unemployment and growing distress in the informal economy. .
That said, going into the market with a cap in hand will unleash the nasty side of investors and rating agencies, for whom even one rupee of extra debt means doomsday scenarios. But higher allocations are rightly sought for health care, education, rural and urban employment programs, housing programs, credit guarantees for the most affected sectors, including MSMEs, among others.
Even though tax recoveries have surprised on the upside this fiscal year (and likely the next), the market borrowing requirement remains high at over Rs 12 lakh crore in FY23. In fact, Sitharaman indicated as much in his previous budget himself. In line with medium-term fiscal policy, the fiscal deficit is targeted at 4.5 percent of GDP by FY26, implying an average annual reduction of 60 basis points. This means the deficit will likely reach 6.3% or thereabouts in FY23.
But the RBI, whose ingenuity helped the government borrow to its lowest level in 17 years last year, is unlikely to play the godfather. Call it a coincidence, but days away from the 2023 budget, the central bank has announced it. On Friday, Deputy Governor Dr. Michael Patra felt it was time for fiscal policy to return to its vanguard role, as the unsung hero RBI returns to its dutiful complementary position. Loosely translated, this means that RBI will no longer peg long-term bond rates at the sacrosanct 6% and that borrowing rates will rise. In a trailer of sorts, benchmark 10-year rates have already topped the pre-pandemic 6.7% and Patra’s remarks simply put the point in the public domain.
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That said, no one expects a stratospheric jump in government spending either given Sitharaman’s reluctance to spend even at the height of the pandemic. Total expenditure is likely to maintain its trend growth at around Rs 38 lakh crore. It is also the essential FM myth that supply-side economics need not primarily include tax cuts or cash transfers, but regulatory measures and efficient allocation of capital and labor. Some will involve short-term costs, but provide long-term gains, ultimately leading to higher production and lower prices. But these measures mainly require two things: time and political will.
That’s why some think the budget won’t have fireworks, but can stand out simply by providing continuity and with strategies and timelines for initiatives announced in previous budgets. If you recall, several key announcements have remained just that and focusing on executing them will be key. These include privatization, the national infrastructure pipeline, asset monetization, bad banking, including G-secs in the government bond index, and most importantly direct tax reforms.
Thanks to Sitharaman’s FY20 budget, taxpayers now have two choices, but this has only created administrative complexity, and the next budget should iron out the problems. This is essential to increase compliance and broaden the tax base. Only when that happens does the next step of streamlining tax brackets become realistic and achievable, perhaps next year or just in time for the 2024 general election. Meanwhile, Sitharaman must also easier compliance for taxpayers, who have faced inexplicable technical issues, in addition to clarity on the equalization levy and on cryptocurrencies.
When it comes to corporate taxes, the 2019 tax cuts have helped companies increase their profitability. It is the turn of companies to return the favor by embarking on a capex mahotsav. Banks are also waiting for the investment cycle to take off for credit growth to reach double digits. This will also partly solve the emphasis on job creation. Even though the unemployment rate has returned to pre-pandemic levels of 7%, this is due to low labor force participation and a general improvement in jobs, the FM will likely accelerate infrastructure projects, in addition to increase the allocation for the MNREGA.
Obviously priority areas include health care and government allocation should be higher especially for programs like Ayushman Bharat which are severely underfunded. Furthermore, the budget should shed new light on the doubling of farm incomes following the embarrassing dismantling of farm laws.
On privatization, the government should stop cheering the sale of Air India and speed up the privatization of banks and insurance companies. Hitting the right notes, the recent policy on state-owned enterprises in strategic sectors marks the first step to pursue large-scale divestments.