Date: 14/01/2023

Relevance: GS-3: Government policies and interventions for development in various sectors and issues arising out of their design and implementation; Government Budgeting.

Key Phrases: Populist Budget, Fiscal Architecture, High Fiscal Deficit, Structural Reforms, Cooperative Federal Model, Accommodative Fiscal Policy, Gross Primary Deficit

Why in News?

• The Union Budget set to be presented in Parliament in February will be the last full-year Budget of the present government before the Lok Sabha elections are held next year.
• Given the electoral timetable, there is an expectation that the Budget could be populist in nature; but with high inflation there are questions about the government’s ability to spend freely at the moment.

Can the Central government afford to present a populist Budget given the current fiscal situation and high inflation?

• Even though an election is upcoming next year, the government is cognizant of the fact that the fiscal deficit ratio has to be reduced.
• People vote for a government that is responsible. Thus, it is unlikely that there are going to be any major schemes or populist measures announced in this Budget. Rather, fiscal consolidation will be given importance, because the fiscal deficit target of 4.5% of GDP needs to be reached by 2024-25.
• The tone of the Budget will be fiscal consolidation as well as an emphasis on its food security measures.

Checks And Balances Within The Fiscal Architecture:

• Lack of fiscal space available:
  • Before the 2019 elections, there was definitely more fiscal space available to the government. That’s why schemes such as PM Kisan were rolled out, which was probably the first cash transfer scheme the government had brought about.
• High fiscal deficit of the center and states:
  • There is overwhelming pressure to maintain fiscal prudence given the fact that the fiscal deficit is very high at 6.5% for the Central government, and another 3.5% to 4% for the States.
  • Thus, while there could be a lot of measures announced in terms of policy, in terms of absolute Budget numbers, there is not too much space to spend but there could be targeted cash transfers.
• Rising Inflation:
  • Inflation is mounting which hurts the poor, and the Reserve Bank of India is raising interest rates to tackle inflation.
  • So in the upcoming Budget, there will [likely] be social security measures to tackle that to prevent any electoral backlash.

Need For An Accommodative Fiscal Policy:

• The Union Budget needs to be accommodative because monetary policy is constrained in facilitating the growth recovery process as interest rates are mounting and it will affect economic growth in the long term.
• Moreover, fiscal policy needs to be accommodative, not in the sense of fiscally profligate policies, but a prudent fiscal policy focused on capital infrastructure.

Prospects Of An Increase In GDP Growth Because Of The Budget:

• While the Central government has been fairly aggressive in terms of increasing the outlays for capital expenditure, the proportion of capital expenditure to the total amount of investment, Capex spending by the government is minimal.
• This means that the ability of the government to really push forward economic growth would be very much restricted, especially if measures are not been taken on the taxation front.
• So, the growth has to come from the private sector although the government can probably contribute to it, and the States put together could also contribute to it.
• But it would be a misnomer to say that the GDP growth is going to accelerate because of the Budget.

Prospect Of Announcement Of Structural Reforms During The Budget:

• The government has been very positive in terms of structural reforms but the Budget is usually not the platform where these policies are launched.
• Even during the COVID-19 crisis and the lockdowns, policies had been announced, most of which were structural reforms.
• A longer timeframe news to be adopted while looking at various sectors.
• India has a federal structure having States and municipalities. So, the Centre can only do certain reforms.
• India needs lots of reforms, in terms of doing business easier, which has to come at the State and municipal levels.

Need for structural Reforms:

• Structural reforms are crucial because of the structural bottlenecks.
• Focusing on structural reforms is very crucial, particularly because the drop in economic growth that is being experienced is not cyclical.
• Thus, the focus should be on structural reforms, because the growth drop is a permanent scar.
• Cyclical policies will not solve the issue of growth recovery. If the focus is just on cyclicality, growth will not be attained because many issues are structural in nature.

Linkage of the structural reforms with fiscal consolidation:

• One of the important structural reforms is power sector reform to improve the conditions of the power distribution companies.
• That policy is linked to the issue of fiscal consolidation as well because the extra borrowing space that we are giving to the State governments is based on the power sector reforms they enacted. So that kind of linking of fiscal help with structural reforms is crucial.

Conclusion:

• In the cooperative federal model, it is not only policies at the State level, but the policies that the Central government has for transfers to the States that are also important.
• So, an accommodative policy when it comes to capital spending transfers to State governments, in the form of interest-free loans for instance, should be there in the upcoming Budget to support capital investment at the State level.

Source: The Hindu

Mains Question:

Q. Distinguish between capital budget and revenue budget. Explain the components of both these Budgets. (150 words)