Budget 2023: Leaning More On Capex : Daily Current Affairs

Date: 03/02/2023

Relevance: GS-3: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development, and Employment.

Key Phrases: Infrastructure Spending-Focused Capital Expenditure (capex), Saptarishi pillars Dedicated to Green Growth, Tax Concession to Lower Income Brackets, Consumption Cycle through Employment-Creation, Crowd-in Private Capex.

Why in News?

The fifth and final full Budget of the current government leans more on infrastructure spending-focused capital expenditure (capex).
The aim is to lift the post-pandemic domestic economy and simultaneously crowd-in private capex by diverting some spending towards capex and nudging the public sector enterprises (CPSEs) to reinvigorate spending.

Key Highlights:

Focus has been given to capex on account of a slowing economy and slower growth in tax collections in conjunction with the need to reduce the fiscal deficit.
Total central government budgeted capex growth has risen to 30 percent from 26 percent this fiscal.
A capex support was essential in a year when global shocks, rising domestic interest rates, and waning of one-time lift in contact-based services are expected to bring down economic growth.
Thus, the government has largely stuck to its medium-term path of lifting the productive capacity of the economy through higher infrastructure spending rather than directly boosting consumption in a pre-election year.

A Long Way To Go Before Lifting the Investment Cycle:

Recent National Statistical Office data shows fixed investments in fiscal 2023 was still about 5 per cent below the pre-Covid decadal ‘trend’.
Central government capex, though strong and in the right areas, needs States and the private sector to come in more strongly.
States have lagged so far, this fiscal, with actual capex incurred by them at only 37 percent of Budget Estimates (BE).

Private Sector Diffidence:

Private sector investment (which is 35-40 per cent of total infrastructure plus industrial investments) still lags behind.
While corporations are primed for undertaking such investments with healthy balance sheets, the ‘animal spirits’ to engage in more capital investments are yet to be unleashed.

Demands and Priorities of the Private Sector:

Assuredly better demand prospects
Fiscal support through subsidies and facilitation for a green transition
Continued push to the Production Linked Incentive (PLI) scheme, which so far has reaped noteworthy benefits in some of the sectors it covers stable geopolitical conditions
- This agenda is outside the realm of the Budget.

Private Sector Demands Addressed By The Budget:

Boosting the Consumption cycle:
- By continuing to push infrastructure capex, the Budget tries to indirectly support the consumption cycle through employment creation.
- This is complemented by direct tax changes which will mildly support consumption demand from households.
- The tax concession to the lower income brackets will leave more money in their hands providing some support to low ticket consumption items which are awaiting recovery
Facilitation of green transition and subsidy support mechanism:
- With one of the seven Saptarishi pillars dedicated to ‘green growth’, this Budget gives a bigger push to facilitate the green transition and reduce carbon intensity.
- In addition to the recent allocation for the Green Hydrogen Mission, this Budget also facilitates investment and a shift towards greener fuel, energy, mobility, methods of farming, and efficient use of energy. A mix of financial support through capex and subsidies is being pursued.

How Does The Budget Fare On The Scorecard of Transparency and Prudence?

Despite the pressure on revenue spending, the government managed to achieve the fiscal deficit target of 6.4 per cent of GDP in fiscal 2023 supported by higher nominal GDP growth and tax collections.
With the fiscal deficit ratio budgeted at 5.9 percent in fiscal 2024, the Budget has targeted it to be 5 percent of GDP by fiscal 2026.
By reducing dependence on off-Budget, below-the-line items, it maintains its tilt towards transparency.
The nominal growth assumption of 10.5 per cent seems realistic as well as tax collection targets are achievable.
- CRISIL expects real and nominal growth at 6 per cent and 10.5 per cent respectively in fiscal 2024.

What is Fiscal Policy?

Fiscal policy refers to the use of government budgeting, spending, and tax policies to influence macroeconomic conditions, including aggregate demand for goods and services, employment, inflation, and economic growth.
The major purpose of these measures is to stabilize the economy.

Types of deficits:

Revenue Deficit: It refers to the excess of the government’s revenue expenditure over revenue receipts.
- Revenue Deficit = Revenue expenditure – Revenue receipts
Fiscal Deficit: It is the gap between the government’s expenditure requirements and its receipts. This equals the money the government needs to borrow during the year.
- Fiscal Deficit = Total expenditure – (Revenue receipts + Non-debt capital receipts)
Primary Deficit: This indicates the gap between the government’s expenditure requirements and its receipts and excludes expenditure incurred on interest payments on past loans.
- Primary deficit = Fiscal deficit – Interest payments

What are Off-Budget Borrowings?

These refer to loans taken by state government entities, special purpose vehicles, etc., which are expected to eventually be serviced through the state government’s own budget at a later stage.
Hence, they aren’t paid off by the cash flows or revenues generated by the borrowing entity.
It resembles a mere accounting exercise and allows state governments to circumvent fiscal discipline.

Shift In The Expenditure Mix:

While total budgetary capex is seen rising, there is a prominent shift in the expenditure mix.
Effective revenue spending share in GDP is budgeted to fall to 10.4 per cent in fiscal 2024 from 11.5 per cent in fiscal 2023 as the subsidy burden comes down, while share of budgetary capex rises to 4.5 per cent from 3.9 per cent.
A fiscally leaner Budget will assist monetary policy in inflation control.
The Budget thus attempts an act of balancing the competing needs of the economy and fiscal consolidation.

Conclusion:

The continued government capex coupled with a gradual pick-up in private sector spending would act as offsets to the slowing economy although there are plethora of uncertainties.
Global slowdown will hit exports, and any further sharp increase in interest rates by systemically important central banks could induce capital volatility.
The faster-than-expected revival in China’s economy could also create demand-supply mismatches and push prices up.
The geopolitical environment, thus, offers no comfort at this juncture.
If some of these risks materialise, the Budget math could go off the way just as it did last year. Only a flexible and cautious approach can save the day.

Source: Hindu BL

Mains Question:

Q. Distinguish between capital budget and revenue budget. Explain the components of both these budgets.