Editorial 1. A Budget that signals growth with stability


Economic Survey that was placed in Parliament before the presentation of the Budget for 2023-24 has laid emphasis on the point that India has staged a remarkable broad-based recovery to reach the level of income that existed before the outbreak of the novel coronavirus pandemic.

Growth and the fiscal deficit shadow

There have been a series of shocks that began with the pandemic, followed by the war between Russia and Ukraine and the accompanying sanctions that have been imposed by the West on Russia, the slowdown and the recession in major parts of the world and the rise in inflation leading to sharp increases in interest rates, followed by capital outflow and the pressure on the exchange rate.

Even though the economy has staged a recovery and surpassed the pre-pandemic income level, it is still 7% below the pre-pandemic GDP trend; growth has to be fuelled by increasing public investment.

At the same time, with inflation still beyond the upper tolerance limit and aggregate fiscal deficit (Centre and States) still in the range of 9% to 10% of GDP, ensuring macroeconomic stability requires continued fiscal consolidation.

Thus the government is faced with the dilemma of accelerating growth by increasing public investment while containing the fiscal deficit. With interest payments accounting for 40% of the net revenues of the Centre, there is hardly any room for complacency.

The Finance Minister in the 2020-21 Budget had stated that she would bring down the fiscal deficit to 4.5% by 2025-26. That means that in the next three years, the deficit will have to be reduced by 1.9 percentage points. In keeping with this, the fiscal deficit for 2023-24 is slated to come down to 5.9%.

A balancing act

Considering the challenges of increasing infrastructure spending while continuing with fiscal consolidation, it has been a fine balancing act on the part of the Finance Minister. She has continued the trend of making a greater allocation to infrastructure spending, and the capital expenditure is budgeted to increase from 2.7% of GDP to 3.3%. Capital expenditure has a significant ‘crowding in’ effect, it should help to increase private capital expenditures as well.

The Reserve Bank of India has estimated the multiplier effect of capital expenditure at 1.2 — and that should help revive the sagging investment climate. Commercial lending by banks is already on the rise and with deleveraged balance sheets, the increased capital spending should help revive the investment climate further and arrest the declining trend in the overall investment-GDP ratio in the country.

Further, the continuation of the interest-free loan to States to augment their capital expenditures should help in increasing States’ capital expenditures as well. Perhaps, the 6.5% growth rate for 2023-24 estimated in the Economic Survey, which was otherwise considered too optimistic, could indeed materialise with the budgeted increase in infrastructure spending.

Compression in subsidies

The fiscal adjustment is proposed to be achieved by mainly containing revenue expenditure, which will improve the quality of public spending if it happens. The budgeted increase in revenue expenditures for 2023-24 is just 1.2% higher than the revised estimate for the current year. There is a significant compression in subsidies.

The fertilizer subsidy is expected to be reduced by ₹90,000 crore from ₹2.87 lakh crore to ₹1.87 lakh crore. The policy to this effect has already been made in December 2022, when the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY) under which 5 kg of foodgrains were given from April 2020, in addition to the foodgrains given under the National Food Securities Act has been discontinued.

Similarly, the fertilizer subsidy is expected to be compressed by ₹50,000 mainly as fertilizer prices have come down. In addition, allocation to centrally sponsored schemes is expected to come down marginally by about ₹20,000 crore, and the overall current transfer to States is kept constant at 3.3%-3.4% of GDP.


On the tax side, there is some tinkering of customs duty, and the overall protectionist stance has continued. On the personal income tax front, the attempt has been to incentivise taxpayers to move to the new tax regime with no concessions and lower rates. Even so, the increase in the number of tax brackets is cause for worry. Perhaps, it would have been preferable to move over to the new tax regime with fewer brackets.


On the whole, this is a well-crafted Budget, but its success will depend on its implementation.

Editorial 2. The growth deceleration problem cannot be skipped


The much-anticipated Budget for 2023-24 has been presented. The Budget speech began with a self-congratulatory note: that India has successfully overcome the troubles that came with the COVID-19 pandemic, to a large extent, by ensuring the free food distribution scheme for 800 million people and other ongoing food security programmes.

Reversal in aggregate parameters

It also added that India has fully recovered from the output contraction after one year to emerge as one of the world’s fastest growing economies. Finance Minister reportedly said that the economy can now get on with the growth trajectory that it was charting before the outbreak of the pandemic in 2020.

So, what was the economic situation like before the pandemic? It was an economy in decline for the entire decade of the 2010s — perhaps contrary to the Finance Minister’s perception. Real average annual GDP growth rate in the 2010s, that is, net of inflation, had decelerated 5%-6% from 7%-8% in the previous decade, that is, the 2000s. If the professional criticisms of GDP estimates are valid, its annual growth rate is perhaps lower at 4%-5% than official estimates.

More seriously, India has de-industrialised prematurely since the mid-2010s, with a steep fall in annual output growth rates, from 13.1% in 2015-16 to negative 2.4% in 2019-20 even before the pandemic struck. It was accompanied by falling aggregate fixed investment rates and domestic savings rates by 4 percentage-5 percentage points of GDP, compared to that of the previous decade of the 2000s. Never in post-independent India has the economy witnessed such a reversal in crucial aggregate parameters.

Deindustrialization is a process of social and economic change caused by the removal or reduction of industrial capacity or activity in a country or region, especially of heavy industry or manufacturing industry.

The Budget’s vision and expenditure priorities

The Finance Minister’s speech rightly emphasised the role of infrastructure and public investment as virtuous since such investments crowd-in private investment. The Budget seeks to raise capital investment outlay to 3.3%, the highest during the last three years. If the grant-in-aid to States is included, the ratio could be up to 4.5% of the outlays. While this is welcome, it is not clear on what specific sectors and schemes this is to be spent.

The Budget’s extension of the interest-free loans of a 50-year tenure to States for infrastructure investment is also welcome. However, their utilisation has been mixed at best, as the conditions seem onerous on poorer States. There is, perhaps, a need to engage with States to improve their utilisation.

Capital expenditure on railways is proposed to be enhanced to ₹2.40 lakh crore, nine times what it was in 2013-14. This is also welcome, but we need to know what this means in real terms or as a proportion of budgetary outlays. Moreover, without knowing the nature of the proposed expenditure, its effectiveness cannot be assessed.

The government of the day has all along favoured infrastructure investment over directly productive investment in agriculture and industry, whose share in gross fixed capital formation (GFCF) rate (that is, as a proportion of GDP) has declined. However, evidence shows that the share of infrastructure real GVA and GFCF has hardly improved over the decade of the 2010s, as in estimates reported by the Reserve Bank of India. Therefore, there is a need for caution in accepting the budgetary numbers at their face value.

Import dependence on China

Premature deindustrialisation and the consequent growing dependence on Chinese imports are serious challenges to India in following an independent path of national development. The government’s flagship initiatives ‘Make in India’ (launched in 2014) and Aatmanirbhar Bharat Abhiyan (launched in 2020), are meant to overcome these shortcomings. Production Linked Incentive (PLI) Scheme (launched in 2021) was to give incentives for such investments.

However, the Budget has hardly furthered these efforts, or had an assessment of how they have performed. The Budget speaks in glowing terms of how the phased manufacturing programme in the mobile phone assembly industry has succeeded in boosting exports.

Another piece of evidence that shows rising import dependence on China is the growing trade deficit with that country — going up from $57.4 billion in 2018 to $64.5 billion in 2021. The Budget, regrettably, has little to say about the growing threat of structural dependence on China.

The truth about bank credit growth

The Budget mentions rising bank credit growth as a positive sign of investment revival. Again, while the headline is correct, the share of the credit accruing to industry has barely inched up, with most increase accruing to personal loans, which may add to luxury (imported) consumption, and not boost the economy’s productivity capacity.

One of the reasons for private long-term investment lagging is the lack of access to long-term credit, as is widely acknowledged. In 2021 the government promoted The National Bank for Financing Infrastructure and Development (NBFID) with substantial equity investment.

Unfortunately, the Development Financial Institutions (DFIs) seem to have made modest progress in boosting industrial and infrastructure investment. If the Budget is serious about boosting private investment it has to ensure better performance of the NBFID. However, the Budget has little to say about the much publicised initiative.


In sum, the Budget’s renewed commitment to investment-led growth is well taken. However, the investment magnitudes mentioned (without details) seem to come up short. The Budget seems to fail to grapple with the problem of the decade-long growth deceleration in the 2010s, the unprecedented fall in investment and savings rates compared to the previous decade and premature de-industrialisation since the mid-2010s. Without appreciating these longer-term constraints and finding their solutions, it is perhaps hard to make India Atmanirbhar Bharat.


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