By K R Sudhaman
The budget 2023-24 presented to Parliament by Finance Minister Nirmala Sitharaman on February 1 has done some good in ensuring that Indian economy remained stable with macro-economic fundamentals continuing to be strengthened but it failed to bring about out of the box reforms to push the economy to a higher growth path in a difficult global environment.
The good thing that has happened is to ensure that public expenditure is stepped up further to kick-start the economy. Sitharaman has stepped up public expenditure substantially year after year during the last three years and it is now projected at around Rs 10 lakh crore in this budget. This is a welcome development and substantial increase in capital expenditure in Railways too at Rs 2.4 lakh crore is a positive development. But what is more important as former finance minister P Chidambaram points out is to ensure that there are no slippages in achieving the public spending targets. Even in the current year 2022-23, the public expenditure was pegged at around Rs 7.5 lakh, but the actual spending is around Rs 7 lakh crore. The previous year too that target was not achieved, which is not good as this meant that the economy does not have either the absorptive capacity or some leakages-slippages in spending them. This needed to be fixed before announcing such big numbers.
Secondly, another welcome development in the budget is the movement towards fiscal consolidation notwithstanding the difficult times. One good thing that has happened is revenue buoyancy both on indirect and direct collections but the government failure to mop up adequate resources from disinvestment and privatisation year after year is something that needed to be looked at. The adherence to 6.4 per cent of GDP fiscal deficit target in the current year and the proposal to bring it down to 5.9 per cent of GDP in 2023-24 is a positive development as it would help in keeping the inflation under check though prices still have upward risks due to certain global and domestic conditions. Her promise to move towards FRBM target of 4.5 per cent of GDP by 2025-26 is reassuring.
Lowering of personal income tax rates is widely welcomed by the middle class, which is BJP’s constituency has been done with an eye on elections. The middle class underwent major suffering during Covid period with many losing jobs, incomes falling and health expenditure widening. During the two years not much relief was provided to them and in 2023-24, ahead of the elections, the government has sought to provide some relief to them. But the new personal income tax regime proposed as an alternative to the old regime may provide relief to only some categories of tax payers. However, as P Chidambaram and former IIM Prof. R Vaidyanathan point out the new regime is not desirable in a country where there is no social safety net and that savings needed to be encouraged for growth. Chidambaram rightly argues that certain exemptions provided in the old regime for savings, health insurance and housing loans are good economics because they provided a sort of social safety net to middle class as state was not in a position to provide pension, free health care or housing.
Economist Vaidyanathan is justified in saying that the basic strength of India and China is the tendency of the people to save, which provided the impetus to investment and growth. The high gold holdings particularly in India by individual families is an age-old practice to provide much needed security especially to women and came in handy during rainy day. Western economies are consumption driven and there is hardly any household savings. But there the state or the insurance system provide the much needed safety net. Also at a time when savings rate is falling in India, the new personal income tax regime, that does not provide incentives for savings is fraught with danger.
India’s savings rate which was around 33-35 per cent of GDP some years ago as come down to 27 per cent or so. Household savings formed a major chunk of it. If Indian economy is needed to have high growth of 8-9 per cent to eradicate poverty and become a developed country as promised under Amrit Kaal, then India needed to get back to high 35-37 per cent of GDP investment, which happened during the first decade of 21st century. If that high investment has to happen, savings rate needed to get back to 33-35 per cent of GDP as in the past. So the tax regime need to encourage savings and housing development rather than forcing middle class to move towards consumption driven spending. To that extent the new personal income tax regime, which is aping of the western economies, is not a good idea though it may provide some tax relief to middle class. Hence the switch over to new regime needed to be discouraged. It is just a lollipop given ahead of the elections but not a rationale step economically.
The concessions provided to encourage further development of GIFT city in Gandhi Nagar is a welcome development but one thing that has gone unnoticed is the concession provided to encourage investments coming into stocks through participatory notes in a new avatar, will encourage round tripping and money laundering. The Modi government, which promised to bring back $1.4 trillion reportedly stashed abroad and put Rs 15 lakh into the account of all Indians, should have discouraged such round tripping of investments. Participatory Notes in stock market was introduced by then Finance Minister Yashwant Sinha in 2003 as funds started flowing through the Mauritius route by shell companies and subsequently encouraged by Chidambaram, is now being furthered by Modi government to make Gift City an alternative to Mumbai, which is now commercial capital and headquarters of stock Market. Modi government is committed to shifting Bollywood to Uttar Pradesh and stock exchanges to Gandhi Nagar. Earlier the attempts to shift South Indian film industry from Chennai to Hyderabad by N T Ramarao did not have a great response even though some movie making shifted to Hyderabad. Likewise the shifting of Bollywood and stock exchanges from Mumbai may not happen whole hog as perceived by the Modi government.
MSMEs have been provided much needed relief in the budget but an out of the box thinking to introduce MSME credit cards just as Kisan credit cards would have done a lot of good to address lending woes of 6 crore MSMEs in the country, of which 97 per cent are micro industries. The government chose not to pursue this path in the budget despite a strong recommendation from Parliamentary standing committee. With the killing of informal lending after demonetisation in 2016, has resulted in starving of term lending to MSMEs, which accounted for large chunk of employment in the country. MSME credit card could have be an alternative to this term lending woes.
So overall the budget might help in furthering macro-economic stability but is far from much needed reforms in certain areas of concern like MSMEs. It is certainly a case of glass half-full-half empty. (IPA Service)