An economist’s Budget | The Financial Express

An economist’s Budget

All revenue numbers are conservative, 5.9% fiscal deficit for FY24 is a believable target. It’s best to under-promise and over-deliver than vice-versa.

budget 2023, economy
Capital expenditure increases the economy’s productive potential. (IE)

One day ago, Economic Survey 2022-23 was placed in Parliament. Some, unfairly, criticised it as being pedestrian and not flashy enough. The Economic Survey isn’t meant to be a flash in the pan, but to propose what government disposes a day later. In the past, there has often been a disconnect between the Survey and the Budget, but not this time. The Survey made a strong pitch for capital expenditure (roads, highways, railways, housing, urban affairs), which increased post-Covid. The precise figure of the multiplier is dependent on the year, study and methodology. One such figure by Sukanya Bose and NR Bhanumurthy of NIPFP, estimated (in 2013) a capital expenditure multiplier of 2.45, a revenue expenditure multiplier of 0.99 and a transfer-payments (read tax cuts) multiplier of 0.98. Resources have opportunity costs. What’s spent on X cannot be spent on Y.

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Obviously, capital expenditure increases the economy’s productive potential. Again, especially when there is uncertainty, it catalyses and triggers private capital expenditure. There is no question that there is global uncertainty. But there is no uncertainty that this is the last full Budget before an election cycle. In the midst of this uncertainty, there is a phenomenon every commentator is certain of—election years must be tinged with populism. The short-run counts, particularly when it is about counting of votes. Benefits of capital expenditure occur in the long-run and as Lord Keynes wrote, in the long-run, we are dead. Hence, there were expectations about tax cuts. The suffering middle class, whatever be the definition of that expression, must be provided succour. The suffering corporate sector must be provided succour by stimulating consumption and demand. Such expectations have been belied, rightly so. In the seven priorities, the third is infrastructure and investments. To quote, “Investments in Infrastructure and productive capacity have a large multiplier impact on growth and employment. After the subdued period of the pandemic, private investments are growing again. The Budget takes the lead once again to ramp up the virtuous cycle of investment and job creation.” This means direct capital investments by the Union government and incentives and support to state governments for capital investments. Specifically, for the Union government, we have railways (a huge increase), logistics, regional connectivity, and urbanisation. In other words, the finance minister has done what every economist preaches and what every political scientist does not. This is only possible when one is confident about the economy and electoral outcomes. How is the money to be found? Nirmala Sitharaman’s numbers have always been conservative. To quote from the Survey again, “Conservative budget assumptions provide a buffer during global uncertainties.” If real GDP growth is expected to be 6.5% in 2023-24, as per the Survey, and inflation is of the order of 5%, it would have been tempting to pitch for nominal GDP growth of 11.5%. But unlike some past FMs, Nirmala Sitharaman’s Budgets aren’t flashy.

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They don’t warrant 9/10 on Budget Day, with chickens coming home to roost subsequently. Hence, a nominal GDP growth of no more than 10.5%. Hence, no difference between BE and RE in the fiscal deficit/GDP ratio of 6.4% in 2022-23. Hence, all revenue numbers are conservative and 5.9% for 2023-24 is believable. It is best to under-promise and over-deliver than vice-versa. The number of people who submit income tax returns varies from year to year, though it has been increasing. But the number of people who pay income taxes is a lot smaller. This is not because of evasion alone but largely because of tax avoidance. Tax evasion is illegal. Tax avoidance, using exemptions, is not. Exemptions complicate the system. They lead to disputes and litigation. Every economist argues for an exemption-less system. Two years ago, the FM introduced such a system, both for personal incomes and corporate taxes. The taxpayer had a choice. But there weren’t too many who opted for the new system. There wasn’t enough to incentivise the shift. For personal income taxation, this Budget has five announcements that encourage this shift. Eventually, the country will graduate to an exemption-less system. That will be a building block towards a new and simplified Direct Tax Code. Here too, the FM has done exactly what economists advised her to do.

The writer is Chairman, Economic Advisory Council to the Prime Minister

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First published on: 02-02-2023 at 04:30 IST