Sanjeev Ahluwalia | Budget: Is govt trying to do too much to be effective?

High growth generates the comfort of public unwillingness to look a gift horse in the mouth. When growth is more than double the global levels and the highest achieved by any comparator entity, there are even fewer quibbles. This is true for both startups and national economies. Both are subject to “analyst fog” about an uncertain future which puts an analytical premium on a very rosy present.

The present looks exceedingly bright for India. Growth in the current fiscal, ending March 31, 2024, is projected at 7.3 per cent in real terms by the National Statistical Office on the back of a 7.7 per cent growth in the first half of the fiscal year. The IMF has upped its October 2023 estimate of 6.3 per cent to 6.7 per cent in its January 2024 assessment. The Reserve Bank of India projects growth at seven per cent in the next fiscal versus the IMF, which projects 6.5 per cent.

The rest of the world does not glow as brightly. The IMF assesses growth in emerging economies during 2023 at 4.4 per cent, projected growth in 2024 at 4.3 per cent and 4.1 per cent in 2025. This makes India the fastest growing large economy next fiscal (2024-25) as well, ahead of China, which is projected to drop from 5.2 per cent in 2023 to 4.6 per cent in 2024. There is a decisive consensus on India’s economic prospects looking ahead even to fiscal 2025-26, when the IMF projects growth for India at 6.5 per cent -- cautiously lower than in FY2024-25- but still well ahead of the projected growth for emerging economies in 2025 at 4.2 per cent and China at 4.1 per cent.

So, is this what the “Amrit Kaal” (Prime Minister Narendra Modi’s moniker for a golden period) looks like? To be fair, India has a history of performing between 6.5 per cent to 6.7 per cent over long (decadal) spans. An uptick of between 0.5 to one percentage point in the growth rate is conceivable. Productivity gains from technological change and deeper penetration of the digital economy, the enhanced use of artificial intelligence combined with declining global commodity prices and a firming up of global trade trends can trigger growth. All these, however, remain speculative outcomes based on uncertain, exogenous events. What matters is how we ensure that growth does not slow down.

A smart national strategy for remaining ahead of the curve can be crafted around three pillars. First, continue to do what we have done well. This includes hunting for global bargains like oil from sanctions encumbered Russia or hi-tech investment relocating to friendlier shores with a potentially big domestic market. Relocators like high growth but preferential treatment even more -- so flexibility in negotiating deals is key as is the assurance of political stability -- the latter is perceived to be a given.

Second, public welfare is central for all lower-middle economy governments. But a red line must be drawn when welfare handouts compromise growth by under-investment in productivity enhancement. National subsidies, paid from the Budget, at present account for 1.2 per cent of GDP at Rs 4 trillion. The use of technology has improved equity in tax collection but deepening of the tax take in GDP remains a work in progress. The tax-to-GDP ratio remains range-bound between a low 9.98 per cent (2009) and a high 11.17 per cent (2024). Constrained revenues impede public investment.
 

The net tax collected by the Union government of Rs 26 trillion ($313 billion) does not align with “big government” aspirations -- intervening directly in manufacturing, building public infrastructure, and providing private capital goods like affordable homes, new public facilities like hospitals, schools and colleges. Revenue receipts must increase by two to three per cent of GDP -- either by collecting more tax or by generating sufficient “other non-tax revenue” by monetising built public assets and privatising public sector companies and banks. The interim Budget targets just Rs 4.1 trillion (1.2 per cent of GDP) under this head equal to the spend on subsidies.

Linking receipts to tangible demands for expenditure could, possibly, sharpen aggression.

Linking “other capital receipts,” notionally, to budgetary outlays on welfare subsidy payments and development subsidies like subsidies for MSMEs, viability gap funding for green energy technology and grids, electrification of transport and hi-tech manufacturing can determine the minimum scale and scope of this neglected revenue source. With capital outlays increasing by 50 per cent from 2022-23 (by Rs 4.5 trillion or 1.4 per cent of GDP) we cannot hope to sustainably “borrow” to cover both the capital requirements and a revenue gap.

The public debt (Union and states) is already close to 90 per cent of GDP versus the norm of 60 per cent. To enforce discipline in capital use, the Comptroller and Auditor-General should examine the efficiency of our investment plans and allocations. The Incremental Capital Output Ratio (ICOR) is increasing -- a potential red flag that either capital allocations are not efficient, or project execution is tardy.

Third, a key function of the Union government is to maintain fiscal stability. The Narendra Modi government, early on in its first term, focused on reducing the fiscal deficit (FD) from 4.5 per cent to 3.5 per cent by 2017-18. The previous government had abandoned the attempt by 2013-14 as post-Western financial crisis debris. By adopting a hard budgetary stance of keeping pump (retail) prices high despite declining global oil prices, public resources increased enabling FD decline. This hit the middle class hard -- a core constituency of the new government. But it built a stable fiscal foundation and fiscal credibility. This came in handy to increase FD sharply to 9.2 per cent in 2020-21 to deal with the economic shock from Covid-19. That fiscal commitment is missing in the protracted path being followed to a normative FD of four per cent of GDP only by 2026-27 -- perilously close to the next general election in 2029.

More generally, the Union government is a prisoner of overreach. The notion that wisdom laced with finance can be force-fed downwards is questionable. We reject this approach internationally, and it cannot be the best option for a continental-sized Bharat. The Union government would do well to focus budgetary outlays within its core mandates -- security, diplomacy, national standards, space, science and technology, external trade, regulating financial markets and banks, cross-border networks, pan national health, education, and environmental matters. This is not the case today. It allocates capital for a mind-blowing 170 “major schemes”, up from just 73 in 2017-18. Doing less is sometimes more effective and efficient than doing everything.