Key Shortcomings in Latest Budget

News: The Union Budget 2022-23 has projected a fiscal deficit of 6.4% of nominal GDP, a narrowing from the 6.9% assumed in the revised estimates for the current fiscal year ending on 31st March, 2022. In simple words, a fiscal deficit is a shortfall in a government’s income compared with its spending. Nominal GDP is GDP (Gross Domestic Product) evaluated at current market prices. It includes all of the changes in market prices that have occurred during the current year due to inflation or deflation.

Background:

  • Though every economic crisis involves sharp reduction in output growth rate, the specificity of the present crisis in India lies in the sharper reduction in labour income as compared to profits.
  • The consequent reduction in income share of labour was associated with a sharp fall in consumption-GDP ratio as well as absolute value of consumption expenditure during the pandemic.
  • The four components of Gross Domestic Product (GDP)are personal consumption, business investment, government spending, and net exports. It is pertaining to addressing the structural constraints of the Indian economy that restricted growth even during the pre-pandemic period.

Details:

  • The share of revenue and non-debt receipts in GDP has remained more or less unchanged, the objective of fiscal consolidation has been sought to be achieved primarily by reducing the expenditure-GDP ratio.
  • Fiscal consolidation refers to the ways and means of narrowing the fiscal deficit.
  • Hence, the brunt of this expenditure compression fell on revenue expenditure.
  • Expenditure on the payment of wages and salaries, subsidies or interest payments would be typically classified as revenue expenditure.
  • Since the bulk of the revenue expenditure comprises food subsidies and current expenses in social and economic services, reduction in the allocation for revenue expenditure has been associated with fall in several key expenditure that affect the income and livelihood of labour.
  • For example, allocation for both agriculture and allied activities and rural development registered a sharp decline in nominal absolute terms in 2022-23 as compared to 2021-22.
  • Similarly, in the midst of the ongoing pandemic, total nominal expenditure on medical and public health registered a sharp fall in 2022-23 as compared to 2021-22. Such expenditure compression has been associated with the overall fall in the allocation for total social sector expenditure.
  • Despite sharp increase in profits during the pandemic, the corporate tax-GDP ratio has continued to remain below the 2018-19 level due to tax concessions. Despite the objective of fiscal consolidation, the corporate tax ratio continues to remain low and restrict revenue receipts.

Implications:

  • The objective of fiscal consolidation along with the inability to increase revenue receipts has posed a constraint on development expenditure.
  • Developmental expenditure refers to the expenditure of the government which helps in economic development by increasing production and real income of the country.
  • With non-development expenditure comprising of interest payments, administrative expenditure and various other components which are typically rigid downward, the brunt of expenditure compression has fallen on development expenditure.
  • The reduction in the allocation for development expenditure ratio for 2022-23reflects reduction in the allocation for food subsidies, national rural employment guarantee program, expenditure in agriculture, rural development and social sector.