The more important question is, where is the money for such large government expenditure coming from?
February 6, 2023
Image used for representational purpose only. (Express Illustrations)
By Praveen Chakravarty
A Union budget should typically be an accounting exercise of government revenues and expenditures for the past year and projections for the coming year. Over the years, it has evolved into a confused mix of political promises, economic strategy and accounting technicalities in a media spectacle. It is best not to get into the hoopla and analyse the budget for what it is—revenues and expenditures. Where a government gets its revenues from and what it spends on can reveal a lot about the politics of the ruling party. In a well-functioning, frictionless democracy. For the purposes of this column, let us pretend India is still one.
Taxes constitute the bulk of the government’s revenues. Taxes come largely from three sources: corporates through corporate tax, salaried class through income tax, and common people—rich and poor equally—through indirect taxes such as GST, excise duties, etc. In 2010, for every hundred rupees that the Union and state governments combined collected, Rs 40 came from corporates, Rs 21 from the salaried class and Rs 26 from the common people. Today, corporates contribute only Rs 25 while the common person contributes Rs 47.
The tax burden has been overturned entirely in the Modi regime, reflecting the fundamental shift in economic philosophy vis-à-vis the UPA regime. To be clear, this was a legitimate economic strategy that was articulated in a ‘minimum government’ campaign promise in 2014 that overtly believed in incentivising the private sector for trickle-down economic benefits. Only, there have neither been any benefits that have trickled down nor has the government been ‘minimum’.
The belief that lower corporate taxes will spur private investment has been belied. Corporates have used the tax cuts to benefit their firms’ balance sheets and refrained from new investments. Manufacturing Gross Value Added (GVA) grew at a lethargic 4% even before the pandemic, despite all the ‘Make in India’ drama. Repeated pleas, threats and overtures from the prime minister and finance minister have failed to woo corporates to invest. The onus thus shifted to the government to invest and spur the economy. The compulsion for the government to step in was turned into a virtue in the 2023–24 budget.
The FM announced a 40% increase in government investment through capital expenditure (capex) in the next financial year. The government wants to spend Rs 10 lakh crore in just one year on infrastructure and other projects such as roads, railways, ports, telecom, etc. To be sure, capex investments in infrastructure are higher quality expenditures in the long run as they create public goods and are hence welcome. But to place this in context, the government wants to spend more than three times the amount it spent on capex in 2018. The intent to spend is vastly different from the ability to spend since large infrastructure projects have long gestation periods and take time to build. There is justifiable scepticism about the government’s ability to spend such a large sum next year.
The more important question is, where is the money for such large government expenditure coming from? The government cannot increase tax collections dramatically since its tax structure is already skewed, with a heavy burden on the common people to the benefit of corporates who have not reciprocated. So, the FM chose to cut expenditure on MGNREGA by a whopping 33% to be able to partly fund its higher capex. Recall that MGNREGA is a demand-based program for poor people to seek work at minimum wages when left with no other option. The Economic Survey tells us that demand for NREGA work continues to be very high despite tags such as the ‘world’s fastest growing economy’. Essentially, the government has been caught in a quandary and forced to slash welfare expenditure to fund government investment since the private sector has delivered a double whammy of taking lower taxes and not investing. In essence, the government’s revenues and expenditure plan have gone awry, and it has been forced to take this big bet in the 2023–24 budget.
But not everything in the budget adds up. If we grant that the government can spend more on capex effectively, it should reflect in spurring growth and consumption. Strangely, the government does not seem very confident of such robust growth, projecting only a 10.5% increase in nominal GDP vis-à-vis 15.4% growth this year. If such large increases in capex do not result in commensurate increases in nominal GDP, then the government’s tax revenues will also not rise in step with increased capex. In which case, either the government will run a larger deficit or reduce other expenditure (which is unlikely) or find alternate sources of revenues (where?). But the government has committed to also reducing the fiscal deficit from the current year. There is something amiss.
There were other announcements of revisions in income tax exemption limits for the salaried class, which turned out to be a damp squib since it seemed more like a ploy to lure people into the new tax regime than a genuine tax cut. Expectedly, the government announced a litany of other schemes and programs to cater to various sections that are more appropriate in a political speech than in a budget presentation in Parliament.
How a government earns its revenues and how it spends them is reflective of its larger economic objective. The government’s muddled and whimsical decisions in the earlier years of corporate tax cuts and shifting of tax burden to the common people has forced it to make a big bet on government capex in this year’s budget. For the sake of a billion Indians, I sincerely hope this bet pays off.
Political economist & Chairman of Data Analytics of Congress