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Union Budget 2023: Can Govt Control Fiscal Deficit Without Compromising Welfare?

Appropriate policy measures by reducing expenditures, and raising taxes & non-debt receipts can help meet this goal.

Published
Opinion
6 min read
Union Budget 2023: Can Govt Control Fiscal Deficit Without Compromising Welfare?
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Governments are societal institutions to provide public goods and services like defence, law and order, justice, currency, macro-economic stability, and merit goods like health, education, and nutrition. Governments pay for providing these services by raising taxes from the people. In an ideal state of affairs, such expenditures should be fully met from the taxes leaving no fiscal deficit.

The governments, however, have ventured majorly in expanding welfare providing financial and in-kind support to the poor and vulnerable eg, free/subsidised food and fertilisers, and carrying on businesses eg, making steel and providing telephone services. These expenditures, almost more often than not, are funded by raising borrowings, which creates and makes fiscal deficit shoot up.

Large fiscal deficits have many adverse consequences—higher inflation (most acute when the deficit is funded by automatic central bank monetisation), lower growth, and more inequality. Large fiscal deficits also throw governments into a debt trap.
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Fiscal Deficit(FD) Genie Came Out of FRBM Bottle in 2020–21

The Government of India, after suffering the adverse consequences of high fiscal deficits for 50 years, adopted a saner and prudent fiscal deficit approach in 2003 by enacting the Fiscal Responsibility and Budget Management (FRBM) law. The current government rightly hardcoded it in 2018 by amending the FRBM Act to provide that fiscal deficit would be brought down to and thereafter, never exceed 3% of GDP from the year 2020-21.

Ironically in the year 2020-21, the government unleashed the fiscal deficit genie from the FRBM bottle and went for a crazy fiscal deficit exceeding 9% of GDP. Two years have gone by since and the government has continued to maintain high fiscal deficits. The fiscal deficit for 2022-23 was budgeted at 6.4% of GDP.

Budget 2023-24 is round the corner. A very legitimate public interest and fiscal policy question to ask and examine is: can the government bring the fiscal deficit to moderate levels—say to 4% of GDP in 2023-24?

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This Will Require Reduction of FD by Rs. 6 Lakh Crore

I believe the government should and can aim to bring the fiscal deficit down to less than 4% of GDP for 2023-24 without putting the welfare, growth, and real national public finance policy goals at risk.

For achieving this, the government would need to provide for about a 2% additional reduction in the fiscal deficit. As India’s estimated GDP for 2023-24 is likely to be pegged at about Rs 300 lakh crore, the government would need to bring the fiscal deficit down by about Rs 6 lakh crore.

This can be done by taking appropriate policy measures on both sides of the fiscal deficit equation ie, by reducing/eliminating some expenditures, and by raising additional taxes and non-debt receipts.

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Expenditure Side Measures Can Save Rs 4 Lakh Crore

The government’s budgeted total expenditures of Rs 39.45 lakh crore in the current year 2022-23, broadly fall into four buckets:

a) unproductive and non-central government expenditures of interest, pension, mandatory transfers to states, and loans and advances to states (approximately Rs 15.5 lakh crore),

b) public goods and services like defence, internal security, etc (approximately Rs 6.5 lakh crore),

c) redistribution expenditures like food subsidy, direct transfers, health, employment promotion, etc (approximately Rs 9 lakh crore) and growth-oriented expenditures like infrastructure, industrial subsidies, agriculture subsidy, etc (approximately Rs 8.5 lakh crore).

Unproductive and non-central government expenditures included Rs 1 lakh crore of loans to state governments for ostensibly capital expenditures. Besides not being central government expenditures, these loans do not add up to the net resources of the state governments as well as their overall borrowing remains unchanged. These loans also distort federal fiscal relations. The central government is not and must not be the bankers to the states. These loans can be completely done away with in 2023-24 budget to reduce fiscal deficit by Rs. 1 lakh crore.

Many welfare/redistribution expenditures are excessively subsidised. Some are pure freebies. Government can do away with PM-Kisan, petroleum, sugar and interest subsidies. Food and fertiliser subsidies can also be pruned by rationalising charges to some extent. Government can definitely save Rs 1.5 lakh crore from the subsidy bill without compromising genuine welfare.
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The government’s growth expenditures have enormous waste tucked into it. Investments in many corporations and authorities like BSNL, NHAI, Railways can be eliminated or drastically reduced again without harming growth prospects to save about 1.5 lakh crore from the capital expenditure.

There is not much scope in reducing expenditures on public goods and services. There is, however, a case for reforming these expenditures. Expenditures on central police forces and police modernisation need to be cut down whereas expenditures on cleaning up environment needs to go up.

This expenditure side measures together will bring down fiscal deficit by Rs 4 lakh crore.

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Receipts Side Measures Will Require Innovative and Bold Initiatives

There is not much scope for raising income and the value added taxes. Government should focus on addressing distortions like multiple tax rates, surcharges, unnecessary complications of options and unproductive exemptions in personal and corporate taxations in a tax revenue neutral manner.

There are two three big opportunities though.

India currently does not have taxation on wealth. With Indians wealth- real estate, machines and financial- exceeding Rs 15 trillion dollars (five times the GDP), the government can begin to tax wealth by charging a flat 10% tax on capital gains on transfer of wealth without granting indexation and any exemptions.

The government can also consider initiating a pollution and carbon tax regime. Net carbon and pollution emissions by any business beyond the prescribed normative threshold can be subjected to a flat per unit tax.

These two tax measures can easily yield at least additional Rs 1 lakh crore of revenue in 2023-24.

Privatisation and disinvestment programme has got completely mugged up in last three years. It will make tremendous sense if the Government were to transfer Rs. 10-15 lakh crore worth of shares in both financial and non-financial public enterprises like LIC, SBI, Powergrid, NTPC, BPCL etc. to a Sovereign Fund or InVIT. This will, besides letting these companies managed professionally, allow the Government to generate Rs 1 lakh crore of additional disinvestment receipts a year.

These measures will help Government reduce fiscal deficit by at least Rs. 2 lakh crore in 2023-24.

Will the Government Do It?

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I don’t, however, think that Government will take any of these measures. Let me explain why?

Loans to the states for capital expenditures were started in 2021 to tighten central government’s control over state finances and to push the states to undertake capital expenditures of central government’s liking. It is unlikely that the central government will let go this control.

The central Government has been expanding subsidies massively in last few years. Fertiliser subsidies have now been raised to more than 90% of the cost with urea sold under Government mandated Bharat brand. National Food Security Act scheme, which required Government to charge Rs 3/2/1 for rice/wheat/coarse grains, has been replaced with PM Garib Kalyan Ann Yojana (PMGKAY) to provide free foodgrains. LPG gas subsidies have been brought back.

Other subsidies also serve powerful interests. The government is unlikely to take any political risk to do any sensible rationalisation measure like replacing current fertiliser subsidies with cash transfer to the marginal and small farmers.

Stoppage of equity and grants to wasteful BSNLs and MTNLs have many vested interests to serve. Likewise, closure of unprofitable investments and replacement of NHAI’s and Railway’s capital expenditures with viability gap subsidies, prevent politicians from claiming populist credit and co-opted businesses to enrich at public cost. These are too powerful interests to displease.

The government abolished the wealth tax in 2015. It has continued with the distortionary and irrational capital gains regime. It is unlikely to hurt the powerful and wealthy by bringing the wealth taxation law. Likewise, play safe by continuing the status quo rather than rock the boat by initiating a pollution and carbon emissions taxation scheme is more likely the government preference.

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Sovereign fund route of privatisation and disinvestment has been proposed to the government a number of times in the past. There are numerous global success stories as well. The government, however, wanted to do disinvestment by DIPAM only. It seems the government is more likely to put the privatisation and disinvestment programme on the backburner in place of trying any new and good ideas.

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Fiscal Deficit Will Therefore Stay Just Shy of 6%

The government seems to have no respect for FRBM and fiscal deficits. The FRBM law still stipulate fiscal deficit of only 3% of GDP from 2020-21 onwards. Government has not even cared to amend it to bring in line its announced fiscal consolidation programme- 4.5% by 2025-26. Government seems to be at comfort with large fiscal deficits.

Therefore, none of the proposals made above are likely to see the light of the day, despite making eminent sense, for the reasons outlined above.

This being the likely case, we are likely to see the Government peg the fiscal deficit at a tad less than 6% of GDP say 5.9% in 2023-24. Fiscal consolidation will need to wait for another day.

(The Author is the Chief Policy Advisor, SUBHANJALI, Author: The $10 Trillion Dream and Former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

(This is part 5 of our series and special coverage of the upcoming Union Budget, 2023. Read Part 1Part 2Part 3, Part 4 )

(At The Quint, we are answerable only to our audience. Play an active role in shaping our journalism by becoming a member. Because the truth is worth it.)

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