Opinion
The strategy behind the budget is embedded in its fine details
Summary
- India’s deficit targets have won praise but the deft re-ordering of spending needed to achieve that has escaped public scrutiny.
Most significant government documents have an underlying strategy. The budget document is usually an amalgam of political, economic, social and fiscal strategies, the different imperatives calibrated according to the needs of the day. In an election year, there is usually a marked emphasis on political and social objectives. The interim budget presented by finance minister Nirmala Sitharaman embodies a strategy that attempts to focus on political and social objectives even while demonstrating uncompromising fiscal discipline.
The finance minister, as part of a government preparing for imminent elections, had multiple and conflicting objectives. The document had to set itself up as a pre-poll document, which it achieves by tooting a horn on past achievements. But the challenge lay in satisfying fiscal hawks while simultaneously pressing the accelerator on distributive justice. By targeting the 2024-25 fiscal deficit at 5.1% of gross domestic product (GDP), the budget not only makes Indian capital markets more acceptable to foreign investors, but also placates domestic fiscal hardliners who have an inordinately larger share of voice. At the same time, it deftly re-allocates social sector outlays between expenditure heads to areas that need immediate funding, thereby satisfying the electoral imperative.
The fiscal narrative dominates the budget. What is left unsaid is how the minister was able to not only restrict the fiscal deficit during the current year to 5.8% of GDP, despite slower nominal growth than estimated, and report a lower absolute deficit number. The axe, predictably, has fallen on capital expenditure, despite the rhetoric around growth-enabling spending. Then there is a pronounced re-allocation of funds during the current year. While the government has spent more on schemes like the Mahatma Gandhi National Rural Employment Guarantee programme, it has cut back spending on rural housing and road schemes, and smart cities.
The interim budget for the next financial year stands out for its notable absence of announcements on higher subsidies or increased outlays for social-sector schemes. But it must also be remembered that many announcements had already been made during the November assembly elections. For example, the Bharatiya Janata Party promised significantly higher support prices for paddy, apart from guaranteeing additional assistance and bonus pay-outs to farmers. The government also announced, in the middle of election campaigning, the extension of its free-foodgrains scheme for another five years: under this scheme, over 810 million people will get free rice, wheat and millets every month for the next five years. In addition, just preceding the elections, the government not only slashed cooking gas prices for everybody, but also increased the subsidy for poor households.
Then there is the timing issue. Outlays for some of the long-term expenditure items for 2024-25 have been slashed to accommodate higher budgets for meeting the urgent need of nursing the rural economy back to health. A good example is the Pradhan Mantri Gram Sadak Yojana: while the final spending during 2023-24 is only ₹17,000 crore against the budgeted ₹19,000 crore, the next year will see it further slashed to ₹12,000 crore. The big inclusion in the interim budget for 2024-25 is ₹205,250 crore for free foodgrains.
The pre-poll strategy of displaying fiscal restraint while continuing with handouts was made inevitable by the repeated economic shocks to the rural economy: demonetization, the covid pandemic and an inflationary surge over the past 18 months, all of which have resulted in suppressed rural incomes and demand. Even though consumer price inflation has abated somewhat, settling within the acceptable 2-6% band but higher than the 4% target, this unsteady equilibrium is still susceptible to external shocks. Ongoing geopolitical turbulence could once again adversely affect the price line. This apprehension of incipient inflationary trends forced the monetary policy committee (MPC) at Reserve Bank of India (RBI) to leave its policy rates untouched during its first policy meeting for fiscal year 2024-25.
RBI governor Shaktikanta Das said in a statement: “The uncertainties in food prices, however, continue to impinge on the headline inflation trajectory. Taking into account this growth-inflation dynamics and the fact that transmission of the cumulative 250 basis points policy rate hike is still underway, the MPC decided to keep the policy repo rate unchanged at 6.50%." The central bank is currently focused on reducing systemic liquidity to keep inflationary pressures under check.
The combination of a tight monetary policy, likely inflationary threat, continuing rural stress and impending general elections therefore seems to have informed the interim budget strategy. But here’s the thing. This is only an interim budget and the numbers may or may not change when a full budget is presented by a new government in June or July. By the time the future finance minister presents a full budget, an entire quarter would have lapsed and the numbers, as well as intentions, of the interim budget may need to be recast. But while the interim budget data might be fluid, the intentions are not if we assume the same political party will return to power. Interestingly, the government’s intentions are also available for parsing from the 2023-24 revised estimates.
