Political Roots of the Budget’s Sobriety

T K Arun

How come the government has shown sober responsibility rather than wanton populism in the last full Budget available to it before the 2024 General Election? We see many pundits struggle with this puzzle on television and in newspaper columns and either remain puzzled or conclude that this government stands tall, beyond the temptations of expedience to which ordinary mortals are prone.

There is a simpler explanation. After years of low growth and stagnation, the government needs to demonstrate that it can deliver economic growth. The growth rate of gross value added (GVA) at constant prices had declined steadily from 8 per cent in 2016-17 — in November 2016, the government had demonetised high-value currency notes — to 6.2 per cent, 5.8 per cent and 3.8 per cent in the following three years, before turning negative in the first pandemic year of 2020-21.

The GVA in 2021-22 stood just 2.9 per cent above the GVA of pre-pandemic 2019-20, in real terms. The average growth rate of the industry in the five years prior to 2022-23 has been just 3 per cent, below that of agriculture.

While the talk of being one of the world’s fastest-growing major economies sounds nice to the ear, it does not quite fill the stomach, for which the rural folk turned in large numbers to MGNREGA doles in November and December. Filling stomachs calls for real output of goods and services. This is what GVA measures.

The GVA is, of course, gross domestic product (GDP) less net tax on goods and services. The GDP does not measure output as accurately as the GVA does: consider two economies, each with the same level of output and income, that is, the same GVA. One levies a Goods and Services Tax of 18 per cent and offers subsidies worth 3 per cent of the GVA. The other levies GST of 20 per cent and extends subsidies worth 1 per cent of the GDP.

The GDP of the economy with the higher level of net taxes (total tax on goods and services less subsidies) will be higher than that of the economy with lower level of net taxes, even while the incomes generated remain exactly the same in both economies. If the level of taxes and subsidies remained constant year after year, the growth rates of the GVA and GDP would remain the same, but taxes net of subsidies vary, year-to-year, even for the same economy.

In the run-up to the Lok Sabha elections, no ruling party wants to face the electorate with a record of falling growth rates, a pandemic-induced dip in output and a feeble recovery. It must show it can preside over at least one year of robust growth. Hence, the imperative to make the last full Budget before the 2024 General Election an instrumentality, primarily, of generating growth.

In other words, at the current juncture, a responsible, growth-oriented Budget overlaps nearly completely with an election Budget. How does the Budget hope to deliver growth? With a total Budget size that is large, given the average Budget size of 13 per cent of the GDP for the Modi government prior to the pandemic, the total expenditure at Rs 45,03,097 crore is almost 15 per cent of the GDP for 2023-24. Within this, the government has maximised capital expenditure.

Capital spending does not always mean capital formation in the economy. You can repay past loans, and that would count as capital expenditure, with zero direct effect on investment. You can give loans to state governments or public enterprises to repay their loans. That would also be capital expenditure that does not directly add to investment. But the government has promised big-ticket spending on infrastructure. Including grants-in-aid for capital expenditure, the total effective capital expenditure is slated to go up to Rs 13.7 lakh crore, an increase by Rs 3.2 lakh crore.

If project selection is done carefully, and the money is spent efficiently, this can deliver a multiplier effect on growth. Building roads and rail lines will generate demand for labour, cement, steel, granite rubble and aggregate, trucks and earthmoving equipment. Bulldozers will find uses, apart from the creative ones at the hands of the Uttar Pradesh and Madhya Pradesh governments.

During 2008-14, rural wages in India went up in real terms, that is, faster than inflation, for six years on the trot, thanks to the construction boom. The demand for construction labour drew rural folk to towns, with higher wages than they could get back home. Once a chunk of labour migrated out of villages, wages went up for those who remained behind. This is when poverty fell dramatically, much to the embarrassment of the then UPA government, which appointed a committee to revise the poverty line upwards and increase the poor population to satisfy the middle-class sentiment that refused to accept that poverty could actually fall in this country.

Nor does the Budget completely eschew targeting specific voter groups. Those who have moved out of poverty and, driven by ‘aspiration’, are making their way up the income ladder have been a focus group for the present ruling dispensation. Tax breaks are on offer for those with incomes up to Rs 15 lakh a year. While the top rate of income tax has been reduced for those who currently pay tax at the rate of 42.7 per cent, those who buy and sell chunks of real estate at values high enough to make capital gains in excess of Rs 10 crore will now have to pay capital gains tax.

The next big thing to gain popular favour for the PM, on the lines of gas connections for rural homes, is piped water to homes. That is fully funded.

The Budget speech’s opening paragraph talks of bringing the fruits of development to “all regions and citizens, especially our youth, women, farmers, OBCs, Scheduled Castes and Scheduled Tribes.” Accordingly, there is something there for every group. That befits an election Budget. The conscious omission of minorities among explicitly targeted beneficiary groups does its own style of electioneering.

This article was first published in The Tribune as Budget has something for every group on 3 February 2023.

Read more by the author: Hindenburg’s bet against Adani