PM IAS FEB 08 EDITORIAL

Editorial 1: Fiscal consolidation in the context of the Budget

Introduction:

• The Union Budget for 2023-24 has attempted to address the aspirations of different segments of society. It is a good effort in a difficult situation. But how far do the Budget provisions go to meet the two fundamental goals of growth and stability? The two must go together for sustained growth over the medium term, which will be the answer to many of India’s socio-economic problems.

Budgetary support to growth

1. Growth is affected by the size of government expenditure and its revenue and capital components. Government expenditure is budgeted to grow at 7.5% while nominal GDP growth is estimated to fall from 15.4% in 2022-23 to 10.5% in 2023-24.
2. Thus, the total expenditure relative to GDP is shown to fall from 15.3% in 2022-23 (RE) to 14.9% in 2023-24 (BE). The composition of government expenditure, however, would be growth positive.
3. Increase in the Centre’s capital expenditure is budgeted at 37% while that in revenue expenditure is only 1.2%. According to estimates by the Reserve Bank of India (2019, 2020), the multiplier associated with central government capital expenditure is 2.45, while that for revenue expenditure is 0.45. Investment expenditure by central public sector undertakings (PSUs) is budgeted to fall by 0.2% points.
4. However, State capital expenditures may increase as a result of central grants to the States meant for capital asset creation amounting to 1.2% of GDP, augmentation of States’ fiscal deficit to GDP ratio to 3.5%, and the facility of 50 years of interest-free loans for creating capital assets in 2023-24.It is difficult to ascertain the extent to which States might utilise these facilities.
5. Growth may also be stimulated indirectly due to an increase in private disposable incomes following tax slab adjustments applicable to the new income tax regime. Real growth in 2023-24 may be a little above 6%.

External conditions as reason

• According to the Fiscal Responsibility and Budget Management (FRBM) Act, as amended in 2018, the Centre is mandated to take appropriate steps to limit its fiscal deficit to 3% of GDP by March 31, 2021 although this is an operational target. The mandated target pertains to the Centre’s debt-GDP ratio which is to be brought down to 40%.
• If there is a deviation from the fiscal deficit-GDP ratio of 3%, the Centre is required to state the reasons. In the medium-term fiscal policy cum Fiscal Policy Strategy Statement (MTFP), the Centre has attributed the deviation of the budgeted 5.9% fiscal deficit-GDP ratio to external economic conditions. For this reason, the Centre has also not provided the medium-term GDP growth forecasts.
• Furthermore, the Centre has also not indicated the year by which it envisages reaching a fiscal deficit level of 3% of GDP. Instead, it has indicated that a level of 4.5% of GDP would be reached by 2025-26, calling for a steeper adjustment of 0.7% points each in the next two years. It might require another two to three years for reaching a level of 3%.
• However, even by this time, the mandated debt-GDP ratio of 40% would not be reached. The Centre’s debt-GDP level net of liabilities on account of investment in special securities of states under the National Social Security Fund (NSSF), is budgeted to increase from 55.7% in 2022-23 (RE) to 56.1% in 2023-24 (BE). This increase is expected as the primary deficit to GDP ratio is indicated at 2.3% in 2023-24.
• The MTFP statement does not indicate the year by which the government aims to reach the mandated debt-GDP target of 40%. One implication of the high level of Centre’s debt-GDP ratio is for interest payments relative to revenue receipts, which is budgeted at 41% in 2023-24. This reduces, significantly, the space for primary expenditure in the Centre’s budget.

Private investment

• For raising growth in the medium term, augmentation of private investment relative to GDP needs to be ensured. This requires that enough investible resources are left for the private sector after the public sector’s pre-emptive claim on these resources.
• At present, total investible resources, consisting of financial savings of the household sector amounting to about 8% of GDP and net foreign capital inflows amounting to 2.5% of GDP, may be estimated at 10.5% of GDP.
• The central and State fiscal deficits considered together may amount to 9.4% of GDP in 2023-24. This implies that only 1.1% is available for the private sector and the non-government public sector.
• Investment of the Centre’s PSUs themselves amount to 1.1% of GDP in 2023-24, leaving little scope for State PSUs and the private sector. This is not amenable to creating an environment for interest rate reduction. In fact, trying to borrow beyond the available investible resources by the government can only lead to inflation.

Conclusion:

• We know the dilemma faced by the government. Any further reduction in the fiscal deficit will cut expenditures which may not be appreciated. We need, however, a stronger fiscal consolidation road map over the medium term.

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Editorial 2: Neglecting the health sector has consequences

Introduction:

• Budgets are boring documents if we look at them only in terms of financial allocations to sectors. Yet, they are eagerly awaited because they validate the true intent and vision of the government — who or what it “loves” more. And such a judgement is based on the extent to which the Budget helps in furthering the equitable access of all citizens to basic public goods.

Fulfilling commitments

• Soon after World War II left the U.K. devastated, the National Health Service (NHS) was launched as a means to revive society. Envisioning a welfare state, the social economist William Beveridge sought to address the “five giant evils: want, disease, ignorance, squalor and idleness.”
• If India’s vision is driven by such an articulation, then investments need to be prioritised first towards basic services such as nutrition, health, employment, education, environmental sanitation and hygiene, rather than airports, highways and speed trains.
• It may be argued that the government has been fair in this year’s Budget by providing:

1. free foodgrains to 80 crore poor people
2. developing 500 backward blocks
3. broadening access to housing, clean water, and toilets
4. providing employment through the rural employment guarantee scheme
5. providing opportunities for skill development etc.

• But these can only have partial gains; they do not necessarily address the issue of widening inequality. Besides, for sustainable, long-term growth of the country, expanding universal access to high quality education, healthcare and nutrition (not just foodgrains but proteins and other supplementary foods that are currently unaffordable) is imperative.
• No country can go far if a significant proportion of its population is illiterate, unhealthy or malnourished. All the countries that are developed today invested well in education, health and nutrition. Studies in the U.S. show that after the Reagan era, innovation and scientific capability took a hit when public investment in education was reduced to push privatisation.
• The tragedy is the failure of our political leadership, since Independence, in understanding the centrality of universal education and health to growth.

Union budget 2023-24:

• In view of the above, the Budget is disappointing, says Sujatha Rao in a recent article in the Hindu.

• A study showed that 230 million Indians slid into poverty due to COVID-19.
• The ASER report shows the abysmal state of education — many Class 5 students are unable to read a Class 2 textbook.
• NFHS-5 data show that among children aged below five years, 35.5% were stunted and 32.1% were underweight.
• Yet, the allocations for education and nutrition are stagnant. The budget for midday meals reduced by 9%, not counting for inflation, even as data show a shift in enrolment from private to public schools with private schooling becoming unaffordable.
• Disease burden is rising with non-communicable diseases, mental health and geriatric care adding to the load of communicable diseases. India lacks adequate human resources, infrastructure and access to affordable diagnosis and treatment.

Fault lines

• COVID-19 sharply brought into focus three major fault lines: the lack of financial risk protection, which is why citizens incurred huge expenses, estimated to be more than ₹70,000 crore, even as their incomes fell; a broken down primary health system, particularly in the north, that resulted in a large number of avoidable deaths; and the absence of well-equipped and functioning district hospitals to cope with demand. India needs an infusion of resources and a bold imagination to address these.
• Besides, it also showed us the chaotic state of the regulatory framework. Many laws have serious infirmities and embed conflicts of interest. Some need to be scrapped and some amended, for without sound governance, opening up health to market forces can be disruptive and hurt patients, particularly the poor. COVID-19 also underscored the need to invest in public health to build our disease surveillance system and strengthen resilience to such shocks.
• Addressing all this is urgent because there is no guarantee that the worst is over. It is the responsibility of a government to firewall its citizens against any such eventuality by improving the healthcare system and reducing vulnerability. We need political leadership backed by adequate funding in order to rebuild our public health system, promote scientific research, and expand health security. Constructing 157 nursing schools and trying the impossible of “eliminating” a genetic disease is no answer to these serious structural problems.

Conclusion:

• Equity and justice are values that must guide a polity to build a nation. Measuring policy and money allocation only in terms of political expediency is short-term and unsustainable. When such structures collapse, as they will, it is the poor and marginalised who will suffer disproportionately.
• But then disease is an equaliser — many rich people also died during COVID-19 for want of access to a hospital bed or oxygen. The price we paid then, and the lessons learned, need to be remembered. Neglecting the health sector and denying it of critical investments has consequences.