India’s budget for new financial year to be in tough constraints

New Delhi, India – On February 1, Indian Prime Minister Narendra Modi’s government will present its last budget for a full financial year before he, and his party, the Bharatiya Janata Party (BJP), face elections in the first half of 2024 and he seeks a mandate to govern the country for the third consecutive time.

Modi’s government will have to provide for economic growth and a wider social welfare package at a time when global economic headwinds and domestic economic factors make it tough for India to do any better.

The country’s premier economic statistics agency, the National Statistical Office, recently estimated India’s economic growth rate for the current financial year, which ends in March, at 7 percent, lower than the 8.7 percent growth the government had predicted at the beginning of the financial year. The World Bank has predicted India’s growth in the next financial year to be lower, at 6.6 percent. Some other economists have pegged it even lower after seeing the latest government estimates.

The federal government’s ability to increase the amount of money it collects as taxes in proportion to the size of the economy, and its commitment to reduce its fiscal deficit rate, the amount it has to borrow to spend as a proportion of the country’s national income, in subsequent financial years, has now been clearly restrained. Finance minister Nirmala Sitharaman will have her task cut out to deliver on both growth and welfare.

“Assuming that the government will contain the deficit at the budgeted 6.4 percent in 2022-23, there will need to be a reduction of 1.9 percentage points over the next three years, and quite a considerable part of that has to be done in the forthcoming budget,” wrote M Govind Rao, an economist who has served in top decision making and advisory positions in the Indian government.

With an eye on that goal, New Delhi tried in the past year to shore up funds by trying to offload its stakes in a few state-owned companies but with limited success. Coupled with its inability to substantially increase tax collections, the government will be restrained in opening its purse strings.

The government has already been dealing with continuing high prices of goods and services, outside of food and energy or the so-called core inflation, which hovered at above 6 percent in November and will also need to be tamed.

“Our inflation remains elevated, but there has been a welcome softening during November and December 2022. Core inflation, however, remains sticky and elevated,” head of India’s central bank, the Reserve Bank of India, Shaktikanta Das said on January 27.

Repackaging existing schemes

New Delhi’s outlay for basic needs like health and education has already been low.

As a percentage of GDP, the government’s expenditure on education slid from 0.45 percent in 2019-2020 to the budgeted 0.40 in 2022-23. On health, the government budgeted 0.35 percent of GDP as expenditure, lower than what it had spent the year before, according to the Centre for Budget and Governance Accountability, a non-profit watchdog.

The government has limited manoeuvring space to substantially change these numbers in the new financial year because a large share of its budgetary expenditure is already locked into committed expenditures, such as salaries and pensions and an increased load of repaying interest on its borrowings in the previous and current year.

“In real terms [after discounting for inflation], the government’s financial support for many schemes has stagnated or diminished,” said Dipa Sinha, assistant professor of economics at Ambedkar University in Delhi. “In some cases where the government did announce expansion of social welfare schemes, on the ground, the expansion has not happened.”

In the past, the Modi government has covered up for its budgetary limitations and restraints by, at times, repackaging and reconfiguring existing social welfare schemes even as it reaped political dividends by spending consistently on publicity. It has also focused more on ensuring more efficient delivery of social welfare schemes using the unique digital identity for residents called “Aadhaar”, with mixed results and controversies about the exclusion of legitimate beneficiaries.

During the pandemic, Modi topped up a subsidised grain programme for the poor. Under a law that an earlier Congress-led government legislated in 2013, India has provided subsidised food grain to 75 percent of the poor in rural India and 50 percent of the poor in urban areas, and Modi added additional free supplies.

However, in December 2022, the government repackaged and revised the full set of subsidised and free food schemes to save the government 250 billion to 300 billion rupees ($3.06bn to 3.67bn) this year, according to various estimates. The government has not officially said how much it will save on the subsidies through this shift. Instead, it has been celebrating the repackaged scheme as a move that further aids the poor.

To further bolster that claim, the entire food subsidy scheme has been renamed and is now called “Pradhan Mantri Garib Kalyan Ann Yojna” (The prime minister’s food scheme for welfare of the poor). Modi’s government has told the states to make sure the poor beneficiaries get receipts along with the free food that mark out the financial benefit the government has provided.

At the same time, the government pushed hard before India’s top court to not enhance the coverage of its social welfare schemes by taking into account the population increase since 2011 and identifying new beneficiaries. India’s last census was held in 2011 and allocations for several social welfare schemes have used that census as a base. The government has repeatedly deferred the launch of a new census exercise, citing technological and technical reasons.

Record unemployment

Since 2019, the BJP-led Indian government has relied on the private sector to spur growth and provide jobs while it has tried to focus on investing in infrastructure. That year, the federal government cut the rate at which it taxed corporations in the hope that businesses would invest the money they saved from the taxman to kick start higher growth and provide more jobs.

That gambit did not pay off and finance minister Sitharaman has now been loudly complaining about it. “Since 2019, I have been hearing that the industry doesn’t find it conducive [to invest], so I brought the [corporate] tax rate down. I keep defending the private sector when even provocatively people have said what would you want to tell the private sector … I want to hear from India Inc; what’s stopping you?” she asked rhetorically at a public event.

Consequently, the jobs scenario has continued to be bleak. India recorded its worst unemployment rate for 16 months in December 2022: 8.7 percent, according to the Centre for Monitoring Indian Economy (CMIE).

The upcoming budget may be too late to turn the ship and find the resources to replace a reluctant industry to spur growth and at the same time provide more for social welfare schemes even as the rise in inequality is a real concern in India, as was also pointed out by BJP’s ideological parent organisation, The Rashtriya Swayamsevak Sangh (RSS), in a webinar in October.

“In contrast to what even the finance minister admitted some months back, the economic survey the government released today [January 31] suggests that all is great, that the private sector has stepped up on investments and consumption [expenditure by citizens] has risen. But it’s the consumption of the richest 10 percent of the population that is driving consumption,” said Jayati Ghosh, professor of economics at the University of Massachusetts Amherst.

“If, in the economic survey, the government is playing blind to the reality, I doubt that the budget will show a different approach to addressing the economic challenges and try to enhance the incomes, livelihoods and consumption by the bottom 70 percent of the people,” she said.

Nitin Sethi is a member of The Reporters’ Collective.