The Budget 2023-24 is a responsible exercise in fiscal consolidation, having generally eschewed populism. Its proposals should be seen in the context of an avowedly healthy macroeconomic scenario. An overview of India’s macroeconomic fundamentals as well as its weak spots is in order.
The pre-Budget Economic Survey has indicated that post pandemic recovery process is complete and the economy is now poised for sustained inclusive growth. Wholesale inflation, which had remained elevated in double digits from April 2021 to September 2022 moderated in the next three months to reach a level below 5 per cent in December 2022 and January 2023.
Corporate profitability, which had shown signs of moderation until Q2 of 2022-23, was still robust with net profit- to-sales ratio at 7.3 per cent. Despite increase in interest rates, interest-to-sales ratio in Q2 of 2022-23 has declined to 2.8 per cent compared to 3.1 in Q2 of 2021-22. The ratio of gross capital formation to GDP has also shown an improvement post pandemic, reverting to earlier levels.
Higher inflation and GDP deflator have brought incremental capital-output ratio (measured against nominal growth) to its decadal low of 1.6 in 2021-22 and 2.1 in 2022-23 compared to a pre pandemic average of 2.7. Institution wise, the lowest ICOR is for the household sector and highest is for the non-financial public sector. Even non-financial private corporate sector had an average ICOR of 3.5 in pre-pandemic period. With inflation and GDP deflator expected to moderate to around 5 per cent, ICOR for nominal GDP growth may move closer to the pre pandemic average.
Capital expenditure of Government (CE), including assistance to the States for capital formation, has shown a consistent increase in the post-pandemic period. It is slated to reach 4.54 per cent to GDP in 2023-24. With fiscal deficit declining from its peak during the pandemic, there is likelihood of a decline in the draft of Government on household savings.
During 2020-21, the incremental borrowings of Government were nearly 79.4 per cent of the available household savings (gross savings-own capital formation) as against just 44.8 per cent during 2016-17. With fiscal consolidation, a considerable decline is likely, although the ratio though may not revert to the 2015-16 level. This leaves additional resource for the private sector, including the household sector.
After two years of lull, private final consumption expenditure (PFCE) is showing a buoyancy greater than one, indicating revival of consumer spending, though whether there is commensurate upsurge in rural sector is not clear. Anecdotal evidence, however, suggests sluggish growth in rural areas. A snapshot of macro and fiscal parameters is in Table 1.
The Budget has been more cautious than optimistic, despite these parameters. GDP growth and tax buoyancy may appear achievable with some difficulty. However, what is not clear is whether we have laid sufficient foundation for the economy to reach $5 trillion by 2024-25. Here, the weak spots of the economy deserve consideration.
The weak spots
The Budget does not seem sufficiently equipped to handle the plight of MSMEs, especially the smaller ones, which died out during the pandemic, raising manufacturing share in GDP and dealing with unemployment. The Budget has announced certain measures for the Micro Small and Medium Enterprises (MSMEs) sector such as extending the Credit Guarantee Scheme for MSMEs with an infusion of ₹9,000 crore, but with more than 11 crore persons employed in this sector, it is insufficient.
It is not clear how the destroyed capital is going to be replenished. The enhanced turnover limit for presumptive taxes and recognition of expenditure as they occur may help. On manufacturing, nothing much has been contemplated. How are we going to increase its share in GVA to 25 per cent is not clear from the Budget. Maybe we will have to wait for measures beyond the Budget.
Emphasis on green energy will help to an extent. The performance linked incentive schemes currently targets turnover rather than employment generation and value addition. Value addition and turnover differ significantly across industries and so does capital intensity per worker. Enhancing efficiencies in these areas need to be comprehensively addressed.
The reason why private sector is not investing despite having resources has not been analysed. The measures that are required to be taken to generate confidence with stable policies and transparent regulations have not yet been addressed appropriately. Some of them would be outside Budget but no indication of the plan to address them has been outlined.
Unemployment and inadequate consumption of the people at lower part of the pyramid are serious issues. How to enhance employment is not clearly spelt out. Between 2017-18 and 2020-21, total employment increased by 18.5 per cent, nearly three fourths of which was in self-employment (PLFS data). Increase in regular/salary employment was only 12 per cent. Within self-employment, number of helpers increased by 50 per cent as against only 17 per cent increase in own account enterprises.
The pandemic adversely affected the quality of employment. Further, higher the level of education, higher is the chance of being out of the job market. The ratio of persons placed out of persons trained is still around 20 per cent. Though capital expenditure is enhanced, it is with an emphasis on Railways; these are not the real employment generators although their multiplier effect on growth is very high. Rural road laying does generate employment. Capital expenditure to GDP (Centre and States) has not improved.
Besides, we are not sure whether the government machinery will utilise the full allocation of capital expenditure. Their capacity does not inspire confidence.
Gopalan is a former Finance Secretary, and Singhi is a former Senior Economic Adviser, Ministry of Finance