The government will not deviate from its fiscal consolidation path in the upcoming Interim budget with a continued focus on capital expenditure to carry India's growth momentum forward, says Lekha S. Chakraborty, economist and professor at the National Institute of Public Finance and Policy, an autonomous institute under the Ministry of Finance.
In an interview with Outlook Business, she said, "The fiscal dominance in capex (capital expenditure) is crucial for sustaining the economic growth numbers. It should crowd in private investment. Not instantaneously of course, but with a lag. So continued focus on capex is crucial."
Finance Minister Nirmala Sitharaman is set to present the budget for the fiscal year 2024-25 on Feb 1. Officials in the ministry have on numerous occasions said that the aim is to bring India's fiscal deficit below 4.5 per cent, without compromising growth. The target for the current financial year was set at 5.9 per cent.
Following are the edited excerpts from the interview:
Is Finance Minister Nirmala Sitharaman’s statement about no “spectacular announcements” in the interim budget a potential bluff, given the precedent of the significant tax rebate announcement in the 2019 budget before the elections? Or we really are heading towards a more subdued budget?
Of course the government will not deviate from its fiscal consolidation path. The political economy of populist measures can be alarming though. Tax side announcements, especially if they invoke Section 88 C - a differential tax exemption for women, could be a possibility to woo women voters.
Each passing year, the government has consistently fallen short of achieving its disinvestment budget targets, drawing substantial criticism from numerous economists. Do you anticipate a repetition of setting an ambitious target this year, or do you think the government will exercise more caution in its approach?
Disinvestment targets are always aspirational. The credibility of disinvestment budget estimates is always questioned. My hunch is there will be a realistic projection for disinvestment proceeds this time.
Also over recent years, the government has significantly escalated its spending to attract private investments. However, data and several experts indicate that the private sector has not responded as anticipated to the government’s efforts. In fact, there is a growing consensus that India’s current growth narrative is primarily propelled by government expenditure. Given this scenario, do you believe it will be challenging for India to reduce the fiscal deficit to below 4.5%, and that too, on a sustainable basis if the government continues its spending spree to encourage private sector participation?
The fiscal dominance in capex is crucial for sustaining the economic growth numbers. It should crowd in private investment. Not instantaneously of course, but with a lag. So continued focus on capex is crucial. Given this, fiscal deficit will be little less than 6 per cent this fiscal year with a target of 4.5 per cent fiscal deficit by 2025-26. That glide path is crucial.
The benefit of the decrease in crude oil prices was not passed to the consumers. This is a point that opposition has also raised in the past, while criticizing the Central government. Does it happen to be that India’s current buoyancy in revenue is largely dependent on oil prices, or is this a part of a strategy to contain fiscal deficit to below 4.5%?
Geopolitical risks and uncertainties do affect fiscal arithmetic. Now the longer route via Cape of Good Hope (when Red Sea and Suez Canal are not effectively functional) leads to supply chain disruptions and mounting inflation. It is not the question of energy prices per se, but is a wider question of link between global headwinds and budget arithmetic. It affects central bank announcements on interest rates as well.
Do you think it is the right time for the government to start providing incentives to investors to invest in thematic capital such as the green bonds? Developed economies are making good use of these instruments by providing tax rebates and dedicated schemes to the investors but India seems to be missing the bus in this era of energy transition by not doing the same.
Fiscal transition and energy transition are indeed moving together. Thematic bond financing for climate change commitments is a good idea. Along with that fiscal transparency and accountability related to climate change spending is equally crucial which does require a climate responsive budget statement.
Given that this is slated to be an Interim budget, can we expect a fiscally conservative approach with a reluctance to make announcements that might intensify the ongoing debate on distinguishing between freebies and welfare measures?
The political economy of freebies is dangerous. I believe the government this time will not enter into such announcements to woo the calculus of voter's consent. However, targeted cash transfers to farmers and women in care economy could be a possibility. In addition we have Public Financial Management (PFM) tools like gender budgeting, which is not at all a freebie. Government might strengthen these PFM tools like gender budgeting to gain the confidence of women voters.
In the end, what could possibly emerge as the focal points in this Interim budget? And what you think ideally should be the focus?
The focal point of interim budget will be fiscal consolidation with an aim for economic growth through continued capex.