India’s budget for the new financial year will be under severe constraints | Business and economy news

New Delhi, India – On February 1, Indian Prime Minister Narendra Modi’s government will present its last budget for a full financial year before he and his party, the Bharatiya Janata Party (BJP), face elections in the first half of 2024, and he is seeking a mandate to governs the country for the third time in a row.

The Modi government will need to deliver economic growth and a broader social package at a time when global economic headwinds and domestic economic factors make it difficult for India to do better.

The country’s premier economic statistics agency, the Office for National Statistics, recently estimated India’s economic growth rate for the current financial year ending in March at 7 percent, lower than the 8.7 percent growth the government had initially forecast of the financial year. . The World Bank predicts that India’s growth in the next financial year will be lower than 6.6 percent. Some other economists pegged it even lower after seeing the latest government estimates.

The federal government’s ability to increase the amount of money it collects in taxes in proportion to the size of the economy and its commitment to reducing the level of its fiscal deficit, the amount it must borrow to spend as a share of the country’s national income, in the following financial years, is now clearly limited. Finance Minister Nirmala Sitharaman will be tasked with achieving both growth and prosperity.

“Assuming the government keeps the deficit at the budgeted 6.4 per cent in 2022-23, there would need to be a reduction of 1.9 percentage points over the next three years, and quite a significant part of that needs to be done in the upcoming budget,” wrote M Govind Rao, an economist who has held senior decision-making and advisory positions in the Indian government.

With that goal in mind, New Delhi has tried over the past year to raise funds by trying to offload its stakes in several state-owned companies, but with limited success. Coupled with its inability to substantially increase tax collections, the government will be constrained in opening its purse strings.

The government is already grappling with continued high prices of goods and services, outside of food and energy, or so-called core inflation, which hovered above 6 percent in November and will also need to be tamed.

“Our inflation remains high, but there was a welcome moderation in November and December 2022. However, core inflation remains sticky and elevated,” Reserve Bank of India Governor Shaktikanta Das said on January 27.

Repackaging existing schemas

New Delhi’s spending on basic needs such as health and education is already low.

In the past, the Modi government has sometimes met its budget constraints by repackaging and reconfiguring existing welfare schemes [File: Adnan Abidi/Reuters]

As a percentage of GDP, government spending on education has dropped from 0.45 percent in 2019-20 to a budgeted 0.40 percent in 2022-23. On health, the government has budgeted 0.35 percent of GDP as spending less than what it spent the previous year, according to the Center for Budget and Management Accountability, a nonprofit organization.

The government has limited room for maneuver to change these figures significantly in the new financial year, as much of its budget spending is already locked into committed costs such as wages and pensions and an increased burden of paying interest on loans in the previous year. and current year.

“In real terms [after discounting for inflation], government financial support for many schemes has stagnated or reduced,” said Deepa Sinha, assistant professor of economics at Delhi’s Ambedkar University. “In some cases, when the government announced an expansion of welfare schemes, on the ground, the expansion did not happen.”

In the past, the Modi government has masked its budget constraints and constraints, sometimes repackaging and reconfiguring existing welfare schemes, even as it has reaped political dividends by consistently spending on publicity. It has also focused more on ensuring more efficient delivery of welfare schemes using the unique digital identity for residents called ‘Aadhaar’, with mixed results and controversy over the exclusion of legitimate beneficiaries.

During the pandemic, Modi added a subsidized grain program for the poor. Under a law that a previous Congress-led government passed in 2013, India provided subsidized food grains to 75 percent of India’s rural poor and 0 percent of its urban poor, and Modi added additional free supplies.

However, in December 2022 the government repackaged and revised the full range of subsidized and free food schemes to save the government 250 billion to 300 billion rupiah ($3.06 billion to $3.67 billion) this year, according to various estimates . The government has not officially said how much it will save in subsidies through the switch. Instead, he is celebrating the repackaged scheme as a move that further helps the poor.

To further support this claim, the entire food subsidy scheme has been renamed and is now called ‘Pradhan Mantri Garib Kalyan Ann Yojna’ (Prime Minister’s Food Scheme for the Welfare of the Poor). The Modi government has told states to ensure that poor beneficiaries get receipts along with the free food that note the financial benefit provided by the government.

At the same time, the government has persistently insisted to the Supreme Court of India not to increase the scope of its welfare schemes, taking into account the population growth since 2011 and identifying new beneficiaries. India’s last population census was conducted in 2011 and the allocation of funds for several welfare schemes used this census as a base. The government has repeatedly delayed the launch of a new census, citing technological and technical reasons.

Record unemployment

Indian workers rest near goods before transporting them in New Delhi, India
The BJP-led Indian government relies on the private sector to create jobs [File: Manish Swarup/AP Photo]

Since 2019, India’s BJP-led government has relied on the private sector to drive growth and provide jobs while trying to focus on infrastructure investment. That same year, the federal government cut the corporate tax rate in the hope that businesses would invest the tax savings to spur higher growth and create more jobs.

That gambit didn’t pay off and Finance Minister Sitharaman is now vociferously complaining about it. “From 2019, I hear that the industry does not find it favorable [to invest]that’s why I brought [corporate] tax rate down. I continue to defend the private sector even when people have said provocatively what you would like to say to the private sector… I want to hear from India Inc; what’s stopping you?” she asked rhetorically at a public event.

Hence, the jobs scenario continues to be bleak. India recorded its lowest unemployment rate in 16 months in December 2022: 8.7 percent, according to the Center for Monitoring the Indian Economy (CMIE).

The upcoming Budget may be too late to turn the ship around and find resources to replace a reluctant industry to boost growth and at the same time provide more for welfare schemes, even though rising inequality is a real concern in India, as was also pointed out by the BJP’s ideological parent organization, The Rashtriya Swayamsevak Sangh (RSS), in a webinar in October.

“Contrary to what even the finance minister admitted a few months ago, the economic survey the government published today [January 31] suggests that all is well, that the private sector has boosted investment and consumption [expenditure by citizens] has risen. But consumption by the richest 10 percent of the population is what drives consumption,” said Jayati Ghosh, an economics professor at the University of Massachusetts Amherst.

“If the government is playing blind to reality in the economic survey, I doubt the budget will show a different approach to tackling economic challenges and try to improve the incomes, livelihoods and consumption of the bottom 70 per cent of people,” she said.

Nitin Sethi is a member of The Reporters’ Collective.

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