More often than not, budgeting exercise of a government hinges on one simple question: Is the government fiscally overstretched or overleveraged? The answer paves the path for fiscal spending and marks its deficit levels. About a month to go for the Centre to present its budget, what would be the probable answer for it?
The first key is in determining debt and liability level. For that there should be reference points. India has two: Fiscal Responsibility and Budget Management Act (FRBM) of 2003 and Fifth Finance Commission (FC) report of 2020.
After the 2018 amendment, the "fiscal management principles" of the FRBM Act of 2003 read: "The Central Government shall (a) take appropriate measures to limit the fiscal deficit up to three per cent of gross domestic product by the 31st March, 2021; (b) endeavour to ensure that (i) the general Government debt does not exceed sixty per cent; (ii) the Central Government debt does not exceed forty per cent of gross domestic product by the end of financial year 2024-2025".
The Fifth FC's roadmap ("indictive" path) puts the targets for total liabilities (internal and external debts and other liabilities) at 62.9% of the GDP in FY21 and at 61% in both FY22 and FY23.
How has the Centre performed?
Moderately high debts
Official statistics show, the Centre's total liabilities for FY23 are estimated at 59% of the GDP – a high level it climbed to in FY21 (59.3%) after more than a decade because of higher borrowings as well as sharp contraction in the GDP as the pandemic hit. The ratio fell to 58.5% in FY22 (RE) but rises marginally in FY23 due to higher capex push. In the previous 14 fiscals of FY07-FY20, its debt-to-GDP remained within 45-50%. In FY05 and FY06, it was over 60%.
Thus, going by the FRBM limit (40%), the Centre has overshot its debts/liabilities but by the Fifth FC's roadmap (61%), it has done well.
Will the actual debt-to-GDP be higher than the budgeted 59% for FY23?
The fear emerges from additional outgo due to (i) extension of "free" ration till December 31 (₹44,762 crore) (ii) higher fertiliser subsidy (Rs 1.1 lakh crore) due to the war (iii) one-time grant of ₹22,000 crore to oil retailers (PSUs) to cover their loss on LPG sale (iv) ₹1 lakh crore oil tax cut in May 2022 and (v) new tax incentives and allocations under the PLI scheme.
But there is no clear answer.
There is no talk of higher borrowing, instead, there have been several reports suggesting that the Centre is mulling slashing expenditure for the first time in three years by about ₹70,000 to ₹80,000 crore (out of ₹39.4 lakh crore) to meet its fiscal deficit (6.4%).
The Finance Ministry's quarterly report on public debt management says, at the end of the April-June quarter of FY23, the gross liabilities increased marginally from ₹139.6 lakh crore in FY22 to ₹145.7 lakh crore. This is well below the budgeted ₹152.2 lakh crore – leaving scope for additional borrowing of ₹6.5 lakh crore. And since India's external debt (USD) has been below 2% of the GDP since FY13 and estimated at 1.8% for FY23 (BE), there is little threat from the rising USD.
In the meanwhile, Centre imposed "windfall tax" on oil exports, hiked import duty on gold, hiked export duty on iron ore and steel and then hiked import duty on coking coal and ferronickel while withdrawing the export duty hike in iron ore and steel six months later. The direct and indirect (GST) tax collections are better than estimated with the total revenue receipt touching 61.2% of the FY23 estimate by October end (CGA).
All these will soak up quite a bit of additional outgo.
Two other keys to the answer are fiscal and revenue deficit numbers. How does the Centre fare in these?
Moderately high fiscal and revenue deficits
As against the FRBM limit of 3% of the GDP, the Centre overshot it by averaging 4.8% during the 10 fiscals of FY13-FY22. The budget estimate for FY23 is 6.4%. The Centre has overshot the Fifth FC targets too, which were 7.4% for FY21, 6% for FY22 and 5.5% for FY23. The actual numbers for the respective fiscals stand at 9.2%, 6.9% and 6.4% (BE). So, there is a case for fiscal restraint.
As for revenue deficit, the FRBM Act doesn't set a limit but the Fifth FC does – 5.9% of the GDP in FY21, 4.9% in FY22 and 4.5% in FY23. As against this, the Centre's numbers are 7.3%, 4.7% and 3.8% (BE), respectively. It did falter in FY21 but achieves the targets in FY22 and FY23 (BE). Its average revenue deficit for the 10 fiscals of FY13-FY22 has been 3.5%.
Will the actual deficits for FY23 be different?
The Controller General Account (CGA) data shows, by the end of October 2022 (seven months), the fiscal deficit stood at 45.6% and revenue deficit 38.8% of the budgeted amounts. This is a credible performance, especially when revenue collection stood at 61.2% of the estimates at the same time.
Compared to the deficit numbers and revenue collection, the Centre's performance in expenditure is relatively poor – and a cause for worry. By October, its capital expenditure was 54.6% and revenue expenditure 54.3% of the budgeted targets – taking the total expenditure to 54.3% (CGA). Then, there is fear of cut in fiscal spending.
High imperatives for bigger fiscal push
The economy is witnessing a K-shaped recovery with some sectors doing well but not others. The pandemic hit the middle- and low-income groups, small and medium industries harder. One symptom is weaker consumption growth, especially for mass consumption goods. Growth in consumption (PFCE) fell from 25.9% in Q1 of FY23 to 9.7% in Q2. Half-way through the fiscal, the GDP growth is down from 13.7% in FY22 (H1) to 9.7% in FY23 (H1). Further, the RBI has lowered the growth to 6.8% for the full fiscal (also lower than 8.7% in FY22). At 6.8%, the next quarters' growth will average 3.7%. The FY24 fiscal can't be expected to be better.
The real question then is: Should Centre invest more to revive growth and correct the K-shaped distortions or worry about its debt and deficit levels?
Before answering this, a few more facts:
One, India witnessed a prolonged slowdown before the pandemic and the GDP growth fell to 3.7% in FY20. In FY21, the growth fell to -6.6% – double the fall against the global average of -3.1%. This was followed by an uncertain recovery as reflected in the industrial output (IIP) which hit 26-month low in October 2022 (-4%) – the festive month when it should have reached record levels.
Two, there is a general agreement that fiscal consolidation in the European Union in the wake of the Great Recession of 2007-08 – that is, adhering to the 60% debt and 3% fiscal deficit limits that the Maastricht Treaty of 1992 mandates – was too strong. It delayed its recovery.
Three, there is a general view that the pandemic saw generous fiscal support and high liquidity infusion in the US and European economies, leading to quick recovery but causing inflation (before the war aggravated it). India adopted a conservative approach (low fiscal spending and lower liquidity infusion), which produced moderate inflation but resulted in the K-shaped recovery.
Four, it was the IMF which imposed the 60% debt and 3% fiscal limits (fiscal austerity) on India (leading to the FRBM Act of 2003) and the world (it prescribes this rule since 1985 to now over 100 countries). The Maastricht Treaty too follows its logic of this austerity. But after the pandemic, the IMF is now vocal about raising these limits. It argues that the ground realities have changed both before and after the pandemic: (a) pre-pandemic cheap interest rates, post-pandemic need for higher and continued cash support to people and businesses in distress and (b) general government debt crossing 100% mark in advanced economies and 60% mark in developing countries.
The pandemic saw Nobel laureates Joseph Stiglitz, Amartya Sen, Abhijit Banerjee and others like Raghuram Rajan strongly and vociferously advocate fiscal expansion. Stiglitz warned the U.S. saying that "the true danger is austerity" and explained that lower fiscal spending would constrain growth and cause higher debt-to-GDP ratio, contrary to what fiscal austerity seeks to achieve.
Now consider the general government (Centre plus states) debt of India.
For 2022, India's debt at 83% (of the GDP) is one percentage point lower than the G20 (developed and developing countries) average of 84% (India is a member). In 2021, the OECD (high-income countries) averaged 95%. But among its peers, the Emerging Market and Developing Economies (EMDEs), India's debt is higher than their average of 64.5% for 2022 (IMF).
Considering all the above facts and evidence, the answer seems clear: The case for far stronger fiscal push triumphs over the need to be cautious over debts and deficits.