03 Feb 2023: UPSC Exam Comprehensive News Analysis

C. GS 3 Related

Category: ECONOMY

1. Putting Budget 2023 into perspective

Syllabus: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Prelims: Facts about Union Budget

Mains: Analysis of Union Budget 2023-24 and the trends in the Indian Economy

Context

The Union Finance Minister presented the Union Budget for FY 2023-24 on February 1, 2023.

Background

• The Economic Survey 2022-23 suggests that the Indian economy is expected to post a real GDP growth of 7% in 2022-23 and further expects both the retail as well as wholesale inflation rates to come below the 6% mark in the coming months.
• The Union Budget 2023-24 which was presented against this backdrop has assumed nominal GDP growth of 10.5% in 2023-24, 
  • This implies that the government has assumed a projected inflation rate of just 4%, given the economic survey’s baseline real GDP growth projection of 6.5%. 
• Experts believe that these projections and assumptions made by the government indicate official optimism regarding the Indian economy and the Indian economy will experience a reduction in inflation coupled with high growth even at a time when the rest of the world is witnessing a slowdown and inflation.

Key highlights of Budget 2023-24 and analysis

• The Economic Survey had expected a new cycle of investment-led growth led by the private corporate sector, aided by increasing credit from the banks.
  • However, the Union Finance Minister, rather than relying upon such predictions, has announced a significant increase in capital expenditure (capex) in the Budget.
  • This increase in the capex aims to crowd in private investment, particularly in infrastructure sectors such as highways, railways, and power plants. 
• Additionally, in the Budget 2023-24, allocations for subsidies extended on food, fertilisers, petroleum and on interest were reduced along with the reduction in the allocation of welfare schemes such as the MGNREGA.
  • This can lead to higher prices of cereals, LPG cylinders and fertilisers such as urea.
• Experts say that the overall impact of such expenditure switching can lead to inflation.

Longer-term assessment of the Union Budget

• It is important to compare the current government’s fiscal strategy in the post-pandemic period with the fiscal strategy of the UPA-II and NDA-I governments in order to get a clear picture of the Indian economic situation.
• Total Expenditure:
  • The total expenditure (annual average) by the Union government had decreased from 15% of the GDP during the UPA-II (2009-10 to 2013-14) tenure to less than 13% during the NDA-I government’s tenure (2014-15 to 2018-19).
  • However, the recessionary risks on account of the COVID-19 pandemic forced the government to increase their total expenditure significantly to 17.7% and 16% of the GDP in the years 2020-21 and 2021-22 respectively.
  • Since then, the total expenditure has declined slightly to about 15% of GDP, ie. 15.3% in 2022-23 and 14.9% in 2023-24.
• Capital expenditure (Capex): Capex has increased significantly since 2020-21.
  • I.e. 1.8% of GDP in the UPA-II era, 2.2% in 2020-21, 2.7% in 2022-23 and 3.3% in 2023-24.
• Subsidies: The overall trends in the spending on subsidies on food, fertiliser and petroleum have been reduced from 2021-22.
• Defence expenditure: Defence expenditure which was 2% and 1.6% of GDP under the tenure of UPA-II and NDA-I governments respectively had reduced to 1.5% of GDP in 2022-23. 
• Agriculture: The total expenditure on agriculture has witnessed an increase during the NDA-II government’s tenure and this is attributed to the allocation to the PM-Kisan cash transfer scheme.
• Education: Education expenditure in recent years has reduced compared to the UPA-II era.
• Rural development and health: Expenditure on health and rural development have remained almost at the same level between UPA-II and recent years.

Tax situation

• Experts point out that the current tax situation is the reason for the reductions in government spending on subsidies and welfare schemes.
• According to experts, the government has been forced to cut expenditure on subsidies and welfare schemes in order to increase capex on infrastructure and this is mainly because of inadequate revenues, which have continued to be the key challenges to public expenditure.
• Gross Tax Revenues: The gross tax revenues as a share of GDP posted a slight increase from 10.2% under the UPA-II tenure to 10.8% under the NDA-I government.
  • However, the percentage of gross tax revenues then declined to about 10% of the GDP during the first two years of the NDA-II government.
  • It was only in the post-pandemic period (since 2021-22) that the gross tax revenues crossed 11% of GDP.
• Corporate Tax: The share of corporate taxes in the GDP has declined as compared to the UPA-II era.
• Income Tax: The percentage of income taxes in the GDP has increased progressively to reach 3% of the GDP in 2022-23. 
  • Further, the revenues from personal income taxes have also become equal to the revenues from corporate tax and this shows a trend of a regressive taxation regime.
  • This has forced the government to provide a few concessions to income taxpayers in the Budget 2023-24.
• Indirect Tax: The share of indirect taxes has also increased under the NDA tenure and it is also considered to be a regressive shift.
  • The percentage of customs duties has declined from 1.6% during the UPA-II to 0.8% in 2022-23
  • However, the share of excise duties has increased from 1.7% under the UPA-II (GST was not introduced) to 2% in 2020-21 and has remained over 1.2% in 2022-23, over and above the GST collections by the central government at over 3% of the GDP. 
• According to the experts, the high share of income taxes in direct taxes and the increasing share of indirect taxes in GDP have led to an increase in income and consumption inequalities.

Trends in fiscal deficit and devolution of taxes to states

• Fiscal Deficit: The fiscal deficit had reduced from 5.4% of the GDP under the UPA-II government to 3.7% under the NDA-I, mainly due to expenditure compression. 
  • However, in the NDA-II tenure (in 2019-20) the deflationary fiscal stance was reversed and the fiscal deficit peaked at 9.2% of the GDP in 2020-21 in the backdrop of the pandemic. 
  • The government has set up a plan of fiscal consolidation and aims to cut down the deficit below 4.5% by 2025-26.
  • The fiscal deficit target for FY 2023-24 in the latest Budget is 5.9%. 
• Devolution of Taxes: The States’ share of taxes in the central divisible pool of taxes was raised from 2.8% of the GDP under the UPA-II to 3.7% of the GDP under the NDA-I because of the increased devolution formula recommended by the 14th Finance Commission. 
  • However, the States’ share in the central divisible pool of taxes under the NDA-II government has reduced to an annual average of 3.4% of the GDP. 
  • The reduction is on account of the increasing incidence of cesses and surcharges imposed by the Union government. This has reduced the size of the divisible pool thereby reducing the tax revenues to the States.

Read more about Union Budget 2023-24 in the linked article.

Comparison with other G20 countries

Image Source: The Hindu

• The above table presents a comparison of the estimates and projections of India’s public debt situation and fiscal balance with the average of other G-20 emerging economies.
• India’s gross public debt peaked at 89% of the GDP in 2020 and has continued to decline.
  • However, the gross public debt of other G-20 emerging market economies has continued to increase and is expected to surpass India’s gross public debt-to-GDP ratio by 2026. 
• The analysis also reveals that despite India’s revenue-to-GDP ratio being lower than that of other G-20 emerging economies, India’s public debt-to-GDP ratio is expected to perform better than those countries’ average and this is mainly because of a higher projected GDP growth of India.

Nut graf: Despite there being concerns regarding the trends in the welfare expenditure, gross tax revenues, devolution of taxes to states and the increase in the fiscal deficit of the country, the projected high GDP growth has ensured that the Indian economy would perform better than other G-20 emerging markets. However, if the projected GDP growth fails to materialise, the macroeconomic situation can become catastrophic.