The headline numbers are impressive, to say the least. The budget promises a 50 basis point – one basis point is one hundredth of a percentage point – reduction in fiscal deficit in a year when nominal GDP growth is expected to slow down by almost five percentage points. That this will be achieved without increasing tax rates or cutting total expenditure is even more promising.
Has the budget done some magic here? Not really, if one looks at the fact that the fiscal consolidation in this year’s budget is only a return to business as usual fiscal scenario. A gross fiscal deficit of 5.9% is still too high if one excludes the post-pandemic period and a complete return to the fiscal glide path continues to be a work in progress.
The real question to ask, as far as fiscal management is concerned, is what has changed in a gradual return to business as usual scenario?
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The answer straightforward. A rollback from government’s revenue expenditure commitments in the post-pandemic period, even as capital spending continues to receive a boost. A large part of revenue spending is a given. It is spent on things such as salaries and interest payments. In absolute terms it will still grow by 1.25% between 2022-23 (Revised Estimate) and 2023-24 (Budget Estimates). The cutback that has happened on the revenue expenditure front is what can be described as its counter-cyclical component. Allocations for subsidies and MGNREGS spending are the biggest examples.
The other key piece of the puzzle to the fiscal maths is a higher tax buoyancy estimate in 2023-24 (BE) compared to 2022-23 (RE). These numbers are 0.99 and 0.8 respectively. The assumption is on the bullish side, given the fact that a lot of earning in the formal services sector is tied to global business environment, which is bound to go southwards next year. However, what could still bail out absolute tax collection numbers despite actual tax buoyancy ending up lower is the fact that the budget has made a relatively conservative nominal GDP growth estimate of 10.5%.
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To be sure, there is more to the fiscal deficit than a balance between government’s taxes and spending. Other heads of government receipts include dividends, disinvestment receipts and market borrowings. The government has factored in higher dividends from RBI, higher disinvestment receipts and higher mobilisation through small savings schemes to compensate for what analysts see as a lower than expected increase in market borrowings which is expected to increase from ₹11.95 lakh crore to ₹12.3 lakh crore.
The other cushion to the fiscal calculations could of course come from the budgeted capital spending of ₹10 lakh crore not being spent entirely, not because of intent but logistical difficulties in making such spending. A lot of such spending is contingent on things such as land acquisition and environmental clearances. The fact that the RE numbers for capital spending are lower than the BE numbers for 2022-23 lends support to this argument.
To sum up the key takeaway from the fiscal claims made in the budget is that the government is willing to pursue fiscal consolidation, even if it entails a reduction in revenue spending a year before the 2024 general elections. The numbers might change slightly, but this direction is unlikely to change until the next budget.