Central Idea

• The Union Budget 2023 has made nominal increases in the allocation for education, which will not suffice to improve the education sector’s current situation.

Government Expenditure on Education

• As per the Economic Survey 2023, the combined expenditure on education by the Centre and States (as a percentage of GDP), has remained stagnant at 2.9% during 2019-20 to 2022-23 (BE).
• As a percentage of total government expenditure, it slid from 10.7% in 2019-20 to 9.5% in 2022-23 (BE), while the share of education in social services nosedived from 42.5% to 35.5% during the same period.

Budgetary allocation for School sector

• Allocation for School Education increases due to new scheme: The school sector has been allocated ₹68,804.85 crores, as against ₹63,449.37 crore last year, largely due to a fresh allocation of ₹4,000 crore for the PM ScHools for Rising India), or PM-SHRI alone.
• Existing schools suffer due to allocation for new initiatives: This combined with the newly announced Eklavya model residential schools to be opened in every district of India actually brings down the provisions for already existing schools and their activities, leaving them high and dry to deal with rising prices and the pressure of increasing enrolment in government schools.
• Majority of Indian students attend government schools: Government and government-aided schools are still where the deprived and have-nots go to. Out of about 15 lakh schools, 10 lakh schools are owned and managed by the government, employing about 97 lakh teachers and catering to over 26 crore students.

Allocation for Higher Education

• Allocation for higher education has increased: The allocation for higher education has increased from ₹40,828 crore to ₹44,094 crore, with autonomous bodies receiving an average increase of 13.60%. The central universities have benefitted the most with a 22.39% increase.
• Reduction in Budgetary Support to Indian Institutes of Management: The budgetary support for Indian Institutes of Management has been drastically reduced with most of the allocation meant for loan repayment. The reduction in funding for IIM was expected due to their increased fees. The impact of this on equity in these institutions is uncertain.
• No provision for HEFA and reduced allocations: There is no provision for Higher Education Funding Agency (HEFA) in this year’s Budget, which means no new loans for infrastructure development in centrally funded institutions. The allocation for world class universities has also been reduced. The allocation for Prime Minister’s Girls’ hostels has been reduced by half.

Allocation for Research and Innovation Initiatives

• Reduction in Startup India and Design Innovation Initiatives: The Startup India initiative for higher educational institutions has been reduced and also provisions for the national initiative for design innovation have been reduced.
• Drastic Reduction in IMPRINT and SPARC Allocations: The allocations for IMPacting Research, INnovation and Technology (IMPRINT) and the Scheme for Promotion of Academic and Research Collaboration (SPARC) have also been drastically reduced.
• No Allocation for IMPRESS: The Budget does not provide any allocation for Impactful Policy Research in Social Sciences (IMPRESS).
• National Research Foundation awaits Cabinet Approval: The proposed National Research Foundation has been allotted ₹2,000 crore through the Department of Science and Technology, but this awaits approval from the Union cabinet.

Conclusion

• In today’s time, everyone wants to benefit and improve their lives. However, not investing enough in education could harm the growth and improvement of education. Unfortunately, the 2023 budget doesn’t offer anything new to make the sector ultimately effective. The education sector needs more investment to improve the quality of education and provide equal opportunities for all students.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

• Union Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24. Union budgets can be understood in two ways. The first is as a standard accounting exercise of the government’s revenues and expenditures. It is this second aspect that provides insight into the government’s assessment of the challenges facing the economy and ways to overcome them.

Crack Prelims 2023! Talk to our Rankers

First aspect: standard accounting exercise of the government’s revenues and expenditures

• Projections are less reliable: Over the years, this has ceased to be a good metric with governments failing to spend what is announced in the budget. While the practice of off-budget entries is now no longer relevant, even revenue projections are much less reliable.
• Budget a comprehensive document: However, the budget continues to remain relevant as the most important and perhaps the only comprehensive economic document of the government.

Second aspect: Government’s assessment of the economic challenges and ways to overcome

• Premature to conclude: While the fog of the pandemic has disappeared and the associated supply bottlenecks have eased, it is premature to conclude that the economy has fully recovered.
• Per capita income is low: Per capita incomes in real terms in 2021-22 are still below the 2018-19 levels and the overall growth between 2016-17 and 2021-22 is at its lowest level of 3.7 per cent for any five-year period in the last four decades.

The pandemic effect:

• Economic slowdown: The fact that the economy was slowing down before the pandemic makes it clear that Covid only exacerbated the already fragile economic situation.
• Energy towards managing the pandemic: The structural factors that led to the slowdown remain, as in the last three years the government’s efforts were directed towards managing the pandemic.
• Decline in demand: The most important of these is the decline in demand, both for consumption and investment. Private consumption accounts for almost 60 per cent of the economy and this engine of growth has failed to fire.
• The distress is far more serious in rural areas: Rural wages have stagnated for almost a decade now. Farmers’ incomes have either declined or, at best, stagnated in the last five years.

Critique: Budget and the rural economy

• Withdrawal of expenditure: What has been done is the withdrawal of expenditure on almost every head that mattered for rural economic recovery. With spiraling inflation and even the cushion of free foodgrains having been withdrawn, rural areas are likely to face an uncertain situation.
• The budget for the agricultural sector is lower than the allocation last year: In real terms, the budget has declined by 10 per cent at a time when the agricultural sector is going through its worst crisis. The rise in input costs for both energy and fertilisers is likely to get worse with the withdrawal of the fertiliser subsidy.
• Declined allocation of cash transfer: Even the nominal cash transfer that was provided as part of the PM-Kisan has seen a decline in allocation. But then, this budget is no different from others in the last five years.
• Actual investment in agriculture is declined: Public investment in agriculture declined by 0.6 per cent per annum between 2016-17 and 2020-21, the last year for which data is available. This is a period when the agrarian economy has suffered its worst crisis of profitability.
• Declined budget for non-farm sector: The non-farm sector is now greater in terms of its contribution to the rural economy but has seen a decline in budget allocations.
• For instance: The budget for the Ministry of Rural Development is 13 per cent lower than the revised expenditure last year. The National Rural Employment Guarantee Scheme (MGNREGA) has seen its budget decline in the revised estimates for 2022-23. This is the lowest amount allocated in the last five years compared to actual expenditure on the scheme.
• Only Hosing scheme has seen an increase: The only scheme that has seen an increase in allocation is the rural housing scheme, from an actual spending of Rs 48,422 crore in 2022-23 to Rs 54,487 crore.

Supply-side interventions in demand constrained economy

• Preference for supply-side interventions: The government’s preference for supply-side interventions even when there is excess capacity in a demand-constrained economy. It is this understanding that is reflected in an almost one-third increase in allocation for investment. A bulk of this is in railways and roads a much-needed boost to the infrastructure sector.
• Private sector needs to accompany: But given the small share of public investment, it is unlikely to be sufficient unless it is accompanied by the private sector increasing its investment. Unfortunately, the private sector neither responding to rising public investment nor tax subsidies, as were given in 2019.
• Overall impact: This will have a negligible impact on employment and domestic demand given the low employment elasticity of these investments. Regardless, the increase in investments is welcome.

Conclusion

• The problem with this budget is not accounting but economic policy. This was the last full budget in which government could undertake serious steps to revive the economy. That required prioritising allocations towards reviving consumption demand, spurring private investment and protecting people from the vulnerabilities of high inflation and a slowing economy.

Mains Question

Q. Discuss the impact of pandemic on Indian economy. Highlight governments supply side interventions in demand constrained economy.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

• Union Finance Minister Nirmala Sitharaman presented the Union Budget 2023-24. It has been marked by areas of continuity over the past three years. However, we should not overlook the missed opportunities for more fundamental reforms while celebrating continuity.

Crack Prelims 2023! Talk to our Rankers

Areas of focus 

• Some areas like the continued boost in capital expenditure have received wide attention. Others, such as the reform of urban development and planning processes have received less.
• As India grows, the quality of urbanisation will determine the quality of economic growth, and vice versa.
• From this perspective, the continued focus on improving urban infrastructure and land-use efficiency is welcome.

Proposals related to urban planning and urbanization

• Urban planning reforms and efficient land use: Cities will be encouraged to undertake urban planning reforms, adopting practices that use land more efficiently, creating resources for urban infrastructure, making urban land affordable, and improving inclusivity.
• Infrastructure financing: Cities will be incentivized to ring-fence user charges on infrastructure and undertake property tax governance reforms so that they are creditworthy enough to issue municipal bonds.
• Infrastructure Development fund for Tier 2 and 3 cities: A fund will be created by using shortfalls in priority sector lending to create infrastructure in Tier 2 and Tier 3 cities. Rs 10,000 crore is the expected amount to be made available for this fund. States will be expected to adopt user charges to access these resources.
• Improving sewage and waste management: Proposals on improvements in infrastructure for handling sewage and managing waste.

Proposals continued from previous budget

• The 2021-22 budget focused on providing urban infrastructure public transport, waste management and universal water supply.
• In 2020-21, the budget, like this year, proposed improvements in sewage treatment and waste management to do away with manual cleaning.
• It proposed tax concessions to encourage overseas borrowing for specified municipal bonds. In 2019, the government announced, and then formulated a model tenancy law to promote rental housing.

What more can be done?

• Shift towards market-oriented reforms in urban planning and development:

1. States and city administrators have themselves come around to the benefits of market-oriented reforms, obviating some of the necessity for the Centre to champion them. This could be driven by the emergence of cities as engines of growth, the resultant commodification of urban land markets and, therefore, the increasing focus on land-use efficiency.
2. Greater openness to new ideas of urban planning could also be driven intellectually by changes in the outlooks of professionals in the field urban planners, architects and administrators who are increasingly able to work directly with state and municipal governments.

• Lack of Political Significance for Urban Governance Reforms:

1. It could be that while cities are increasingly economically significant, they are not yet significant enough politically for politicians to look at urban governance issues more seriously.
2. While the 73rd and 74th amendments to the Constitution devolved many powers to local governments, state governments continue to hold most of the aces. This could change rapidly in the future as India transitions from rural to urban.

Conclusion

• While urban governance systems are improving, India’s cities are still plagued by issues that need fundamental changes. Our building by-laws, restrictions on land use and zoning still create inefficiencies and make our cities unaffordable, dirty and polluted. The government’s steps to increase capacity building and to create expert committees to propose reforms in these areas is commendable. However, the pace of these proposals is inadequate and need to prioritised to meet urban India’s challenges.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

• The Union Budget speech by Finance Minister Nirmala Sitharaman on Wednesday highlighted the government’s continuous efforts to push for digitisation in the country. Also the Finance Minister listed ‘Green Growth’ as one of the seven priorities of her Budget.

Crack Prelims 2023! Talk to our Rankers

Push for digitisation in the country: key highlights

• Digital Public Infrastructure for Agriculture: It will be an open source, open standard and interoperable public good. The platform will offer inclusive, farmer-centric solutions through relevant information services for crop planning and health, improved access to farm inputs, credit, and insurance, help for crop estimation, market intelligence, and support for the growth of the agri-tech industry and start-ups.
• National Digital Library for Children and Adolescents: This will be established for facilitating the availability of quality books in different languages, genres and at different levels. The government will also try to inculcate a culture of reading by collaborating with NGOs, which will provide age-appropriate reading material to everyone.
• Centres of Excellence for Artificial Intelligence: There is a proposal for setting up three centres of excellence for Artificial Intelligence in top educational institutions. These centres, in partnership with leading players in the industry, will conduct interdisciplinary research and develop cutting-edge applications and scalable problem solutions in the areas of agriculture, health, and sustainable cities.
• National Data Governance Policy: Government will formulate a data governance policy to enable access to anonymised data for innovation and research by start-ups and academia.
• 5G Services: A hundred labs will be established in engineering institutions for developing applications using 5G services to realise a new range of opportunities, business models, and employment potential.
• E-Courts: Government will roll out phase three of the E-Courts project to ensure the efficient administration of justice.
• Bharat Shared Repository of Inscriptions (Bharat SHRI): A digital epigraphy museum will be established and one lakh ancient inscriptions will be digitised in the first stage.
• Skill India Digital Platform: The digital ecosystem for skilling will be further expanded by launching a unified Skill India Digital platform for enabling demand-based formal skilling, linking with employers including MSMEs and facilitating access to entrepreneurship schemes.

Elements of the Budget’s Green Growth push

• Green Hydrogen Mission: The recently launched National Green Hydrogen Mission, with an outlay of Rs 19,700 crores, will facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports, and make the country assume technology and market leadership in this sunrise sector. India aims to reach a target of an annual production of 5 MMT of green hydrogen by 2030.
• Energy Transition: The Budget has provided Rs 35,000 crore for priority capital investments towards energy transition and net zero objectives, and energy security by Ministry of Petroleum & Natural Gas.
• Energy Storage Projects: To steer the economy on the sustainable development path, Battery Energy Storage Systems with capacity of 4,000 MWH will be supported with Viability Gap Funding. A detailed framework for Pumped Storage Projects will also be formulated.
• Renewable Energy Evacuation: The Inter-state transmission system for evacuation and grid integration of 13 GW renewable energy from Ladakh will be constructed.
• Green Credit Programme: For encouraging behavioural change, a Green Credit Programme will be notified under the Environment (Protection) Act. This will incentivize environmentally sustainable and responsive actions by companies, individuals and local bodies, and help mobilize additional resources for such activities.
• PM-PRANAM: A new PM Programme for Restoration, Awareness, Nourishment and Amelioration of Mother Earth will be launched to incentivize States and Union Territories to promote alternative fertilizers and balanced use of chemical fertilizers.
• GOBARdhan (Galvanizing Organic Bio-Agro Resources Dhan) scheme: 500 new waste to wealth plants under GOBARdhan scheme will be established for promoting circular economy.
• Bhartiya Prakritik Kheti Bio-Input Resource Centres: Proposal to facilitate over the next three years 1 crore farmers to adopt natural farming. For this, 10,000 Bio-Input Resource Centres will be set-up, creating a national-level distributed micro-fertilizer and pesticide manufacturing network.
• MISHTI: Mangrove Initiative for Shoreline Habitats & Tangible Incomes, MISHTI, will be taken up for mangrove plantation along the coastline and on salt pan lands, wherever feasible, through convergence between MGNREGS, CAMPA Fund and other sources.
• Amrit Dharohar: The government will promote their unique conservation values through Amrit Dharohar, a scheme that will be implemented over the next three years to encourage optimal use of wetlands, and enhance bio-diversity, carbon stock, eco-tourism opportunities and income generation for local communities.
• Coastal Shipping: Coastal shipping will be promoted as the energy efficient and lower cost mode of transport, both for passengers and freight, through PPP mode with viability gap funding.
• Vehicle Replacement: Replacing old polluting vehicles is an important part of greening our economy. In furtherance of the vehicle scrapping policy states will also be supported in replacing old vehicles and ambulances.

Conclusion

• The Union Budget presented by Finance Minister Nirmala Sitharaman outlines the government’s push for digitization and green growth in India. Key highlights suggests that the budget lays the foundation for a more digitally connected and environmentally sustainable India.

Mains question

Q. Recently Finance Minister Nirmala Sitharaman presented Union Budget 2023. many suggests that the budget lays the foundation for a more digitally connected and environmentally sustainable India. Discuss.

(Click) FREE 1-to-1 on-call Mentorship by IAS-IPS officers | Discuss doubts, strategy, sources, and more

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission. However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.

The budget focuses on capital investment

• This year’s Union budget projects an increase in capex by Rs 3.14 lakh crore, as compared to the budgeted numbers of the previous fiscal.
• Given the economy’s savings-investment profile and macroeconomic uncertainties due to the pandemic, private and household investments are likely to be reactive to the general economic environment.
• Achieving sustainable recovery: For the government, making capital investment in such uncertain times assumes a much higher priority and is equally indispensable for achieving a strong and sustainable recovery from the pandemic.
• Increasing share of government: As per National Accounts data, gross fixed capital formation by the general government (Centre and states) has shown an increase as a percentage of GDP from 3.48 in 2011-12 to 3.82 in 2019-20, while other sectors, particularly households, the share fell from 15.75 per cent to 11.39 per cent during the same period.
• The fiscal stance taken in the post-pandemic budgets for higher capital spending, including the budget of 2022-23, is likely to further enhance the general government share in overall capital formation. 
• Important role of the States: it is also important to recognise that two-thirds of the general government’s capital expenditure is undertaken by states and in this context, the announcement of the Rs 1 lakh crore interest-free loans to the states to increase public investment has been a significant step.
•  Since states taken together have a higher share in the country’s public capital spending, effective absorption of this additional borrowing facility will be critical for higher public investment.

Three broad trends on Fiscal Consolidation

• 1] Increase in taxes: The increase in taxes by Rs 5.71 lakh crore between 2020-21 (the first year of the pandemic) and 2022-23 shows that the fiscal challenges have eased, but remain present as we navigate economic recovery in uncertain times.
• 2] Reduction in revenue deficit: Between 2020-21 and 2022-23 (BE), the reduction in revenue deficit has been substantial — from 7.3 per cent to 3.8 per cent of GDP.
• 3] Revenue deficit dominates fiscal deficit: Compositionally, revenue deficit continues to be more than 55 per cent of the fiscal deficit and the management of such a deficit has few important considerations for revenue expenditure, that is, interest payments and allocation under various centrally sponsored and central sector schemes.
• Role of CSS in revenue deficit: Aggregate allocation under centrally sponsored and central sector schemes (CSS) as per the 2022-23 (BE) is Rs 3.83 lakh crore and the interest payment cost of the Union government is Rs 9.56 lakh crore.
• Beyond scheme-wise allocations, it is also important to consider CSS allocation as an issue of macro-fiscal management issue at the Union and state level, especially when it is contributing to the high revenue deficit of the central government and binding state resources for matching contribution, thereby increasing states’ deficit.

Understanding the direction of fiscal consolidation

• The fiscal deficit for the year 2022-23 is higher than what was recommended by the Fifteenth Finance Commission.
• However, if we consider the direction of consolidation, it is towards a reduction in the fiscal deficit.
• Though in the medium-term, the fiscal story is about supporting recovery, it is also true that there is no “one-size-fits-all” solution to fiscal consolidation and debt sustainability. 

Conclusion

The direction of fiscal consolidation rather than a specific quantified path in an unprecedented time like this is probably the most appropriate consideration.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Context

We need to insure the most vulnerable against shocks such as Covid, but even more, we need to create good job opportunities for the unskilled. What can the budget do?

Impact on informal economy

• The last two quarters have seen a substantive recovery in the Indian economy.
• Corporate profitability of our largest firms has hit a new record this year.
• So have GST collections, another indicator of the formal economy, with an average monthly collection of Rs 1.2 trillion in the second and third quarters.
• The glass though is half full, the informal economy was particularly badly hit by Covid and its associated lockdowns.
• Small enterprises, retail, hospitality, and construction were all hammered.
• These were our main source of recent employment growth.
•  Agricultural employment has risen in the last year-and-a-half, while manufacturing and services employment has fallen — this is the opposite of development.
•  Informal service sector jobs may not seem like great jobs to us, but they are greatly prized relative to eking out a marginal existence in agriculture.
• We need to insure the most vulnerable against such shocks, but even more, we need to create good job opportunities for the unskilled, equip people at all levels to participate more fully in the modern economy, and systemically promote wider policies of inclusion.

What can the budget do?

• Create good jobs for unskilled: The way it can do so directly is through accelerating spending on infrastructure.
• The National Infrastructure Pipeline has identified a good set of projects.
• The government should be complimented for its intention and ambition; what we need now is implementation.
• Labour-intensive manufacturing: Most countries developed by putting millions to work in labour-intensive manufacturing.
• We do not have the huge firms in export-oriented labour-intensive sectors that employ millions in China, Vietnam, and Bangladesh.
•  Bangladesh has thrived by putting millions to work in manufacturing.
• A booming garment sector employs 4.4 million.
• As 80 per cent of those employed in garment factories are women, Bangladesh has twice the female labour force participation ratio of India.
• Implement labour laws: In June and September 2020, the government passed four labour laws.
• These laws have since been left dormant.
• The budget should announce a time frame for implementation, notification by the Union government and then by the states.
• Investment in education and skilling:  India has among the least skilled workforces in the world.
• Under 5 per cent of our workforce is formally skilled, compared to 96 per cent in South Korea, 75 per cent in Germany and 52 per cent in the US.
• That is why the work of the National Skills Development Corporation is so important.
• Can the budget specify it as an independent entity controlled and run by the private sector that is then held accountable for delivering on our skilling targets.
• Education is even more important, especially primary education.
• Pratham’s education reports make for sobering reading.
• The New Education Policy has a proposal that every second standard child should be able to read and do arithmetic at the second standard level as a foundation for further education.
• This welcome initiative must receive greater dedication and focus from both government and industry.
• School education is a state subject, so the Union budget can at best incentivise states to do the right things, say by linking the flow of additional funds to those that demonstrate improved second standard learning outcomes.
• As a part of CSR, many companies work actively with schools.
• Education is already the largest single area for CSR spending, accounting for one-third of the Rs 9,000 crore spent by the top 100 companies.

Conclusion

Other policies for economic inclusion must go beyond social inclusion. These include measures like reducing tariffs to benefit millions of consumers instead of thousands of firms. Industrial policies that help all firms such as the ease of doing business, instead of incentivising a selected few.

UPSC 2022 countdown has begun! Get your personal guidance plan now! (Click here)

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

The devastation caused by the second wave calls for the government to shed its worry over the fiscal deficit. The article deals with this issue.

Role of fiscal policy to support economy through second wave

• As India battles to contain the surge in COVID-19 cases, several states have already imposed severe restrictions at the local level.
• The services sector has been hit the most as a consequence of these lockdowns and it would be difficult for India to deliver on this optimistic growth projection.
• Against this background, the role fiscal policy can play to support the economy needs consideration.
• The monetary policy is already accommodative and may not have enough room to further boost the economy.
• With headline as well as core inflation inching up in recent months, the RBI may not be in a position to further cut the policy rate.
•  As per the latest Union Budget, the fiscal deficit is estimated to moderate from 9.5 per cent of GDP in FY21 to 6.8 per cent of GDP in FY22.
• This expected decline in fiscal deficit is not on account of lower fiscal spending but because of expectations of sharper revenue growth.
• The revenue receipts are estimated to grow by 15 per cent and fiscal spending by 1 per cent this financial year.
• With the debt to GDP ratio already more than 90 per cent, additional fiscal expansion will not be an easy choice for the government.

Government need to create fiscal space

• Extraordinary times call for extraordinary measures and the government will have to find ways to create fiscal space.
• This has become especially important as the economy is yet to shrug off the impact of the previous lockdown.
• Under these difficult circumstances, immediate measures must aim at providing the requisite social safety net to the poor and the vulnerable.
• The central government has already announced it will distribute an additional five kg of grain to the 800 million beneficiaries of the National Food Security Act, which is welcome.
• However, given the unprecedented uncertainty brought about by this COVID wave, the ration support under the PDS should be raised further.
• The government should also consider transferring cash to the bank accounts of the poor, just as it did last time.
• This becomes important as MGNREGA  may not provide the safety cushion that it is indeed to as long as lockdown measures remain in place.
• The best stimulus perhaps would be to provide free vaccinations to the population as the benefits of faster and wider vaccine coverage more than outweighs its monetary cost.
•  Immunisation is a public good. As we get over this crisis, the government must increase its outlay on physical and human health infrastructure.

How to finance additional cost?

•  Part of this additional cost may be financed by reducing non-essential government expenditures and use it for COVID-related expenditure.
• The government may need to resort to additional borrowings from the market than budgeted earlier.
• The RBI may allow inflation above the upper bound of 6 per cent only in the short run.
• The plausible rise in interest rates may also be crucial to prevent capital outflows, given the global “economic outlook” when the US economy adopts an easy monetary policy combined with a huge fiscal stimulus.

Conclusion

The government should not be deterred by a worsening fiscal deficit in the short run as the additional growth that it generates may make debt consolidation easier when things normalise.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

The article highlights the trends emerging from the State budgets which dashes the hopes of public-spending led economic recovery.

State-level budget trends

• Over the past few weeks, several state governments have presented their budgets for the financial year 2021-22.
• The states, put together, account for a larger share of general government spending than the Centre.
• States’ spending stance is pivotal to the hopes of a government spending-led economic recovery.

5 Broad trends from the state budgets

• The broad state-level budget trends are based on 11 states that account for a little over 60 per cent of India’s GDP.

1) Offsetting the additional spending by Centre

• There is a collapse in states’ revenues and transfers from the Centre.
• Along with it, there is a “reluctance” among some states to borrow more to spend.
• Thus, the aggregate level spending by these states in 2020-21 will end up being lower than what they had budgeted for before the onset of the pandemic.
• The revised estimates peg their total expenditure to decline by around 6 per cent in 2020-21 from their budget estimates.
• If these trends were to hold for the other states as well, then it would imply that the additional spending by the central government, over and above its budget estimate is likely to be offset by the decline in spending by states.

2) From revenue surplus to revenue deficit

• This year, states which typically run revenue surpluses will run revenue deficits.
• The collapse in revenues meant that states that usually borrow to finance capital expenditure have had to borrow to finance their recurring expenditure (revenue expenditure) as well.
• As a consequence, capital spending by states has been cut sharply.
• States, though, expect the situation to reverse in the coming fiscal year, with most projecting a return to revenue surpluses even as the Centre will continue to run revenue deficits.
• This anomaly is unlikely to be resolved unless the root cause of the situation — the nature of the fiscal compact between the Centre and the states — is addressed.

3) Reluctance by states to borrow

• The Centre had raised the ceiling on their market borrowings from 3 to 5 per cent of GSDP.
• Of this 2 percentage point increase in the borrowing limit, part was unconditional while the remaining was subject to fulfilling Centre-mandated reforms.
• As per ICRA’s estimate, 17 states qualified based on the One Nation One Ration Card reforms, 15 qualified based on the ease of doing business reforms, seven partially completed power sector reforms, while six had completed the urban local body reforms.
• But, it is only the low-income states of Bihar, Rajasthan and Madhya Pradesh with already stretched finances that seem to have availed the additional borrowing space.
• The high-income states of Gujarat, Maharashtra and Karnataka, all of whom had greater fiscal headroom going to the crisis, and were better placed to borrow more and spend, have not done so.

4) Aggressive fiscal consolidation

• As is the case with the Centre, states have, remarkably, budgeted for aggressive fiscal consolidation next year.
• The average fiscal deficit across these states is expected to fall by more than 1 percentage point of GSDP, more than twice the decline recommended by the 15th finance commission.

5) Ambitious revenue assumptions

• The aggressive consolidation next year is expected to be achieved not by expenditure compression, as is the case with the Centre, but by significant revenue enhancement.
• However, some revenue assumptions are quite ambitious, to say the least — some states have pegged their GST and VAT collections to grow far in excess of 30 per cent in 2021-22.
• A deterioration in fiscal marksmanship will mean that expenditure in the coming fiscal year will also end up being lower than what has been budgeted for.

Consider the question “The pandemic has upended the States’ fiscal space, which is evident in their budgets. In light of this, examine the trends emerging from the budgets of the States and their implications for the economy.”

Conclusion

Subdued general government spending during these tumultuous years heightens the risks to economic recovery. Considering the possibility of the economy exiting from this period with lower medium-term growth prospects, there is a strong case for greater government spending during these years.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

Article explains the measures adopted in the Budget 2021-22 for increasing compliance and transparency.

Maintaining the status quo

• COVID-19 has upset fiscal maths around the world.
• It is in this context that the Union budget assumed significance this year.
• The expectations of tax breaks were rife on the presumption that this could boost economic activity.
• Whereas others called for a tax on stock market gains.
• Unyielding to such requests, the budget was based on a pragmatic approach to maintain the status quo.

Why higher tax rates would not help much

• Nearly 60 per cent of corporate taxes are paid by the 0.06 per cent of the companies belonging to the top income bracket.
• On the other hand, among individual taxpayers, only 0.17 per cent report taxable incomes above Rs 25 lakh.
• Therefore, higher taxes would either yield little revenue or adversely affect economic activity.

Need to shift focus to compliance and greater transparency

•  For increasing compliance and transparency, significant proposals have been made:
• 1) Limited the window for reopening the case to 3 years.
• 2) The introduction of the requirement for an assessment officer to provide facts on the basis of which he/she re-assesses.
•  3) The faceless Income Tax Appellate Tribunal (ITAT).
• By making the process of assessment faceless the major causes for litigation are addressed.
• The limited window of re-opening cases for small taxpayers and due consideration of risk management strategy and the CAG’s observations in carrying out such assessments marks an improvement in the process.

Dispute resolution mechanism with better interface

• The Vivad se Vishwas scheme was launched in 2020 to address piling litigation and it is reported that collections under this scheme have been Rs 85,000 crore for 1,10,000 taxpayers.
• This is a small fraction as compared to the Rs 4.34 lakh crore in corporate taxes and Rs 4.49 lakh crore in income taxes that are locked in dispute.
• Therefore, a dispute resolution mechanism that allows for better interface between the taxpayer and the department may, in fact, be relatively beneficial.

Consider the question “Examine the reasons for small tax base in India. Examine the measures adopted in the Budget 2021-22 for increasing compliance and transparency.”

Conclusion

The budget estimates suggest that corporate tax and income tax collections are expected to increase by 22 per cent. With an expected growth rate of 14 per cent in nominal GDP, the remaining gains in taxes are presumably expected from higher compliance or realisation of taxes due. Whether this will pan out remains to be seen.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

A whopping fiscal deficit at 9.5% of GDP for FY21 highlights departure of India’s fiscal policy from the path of fiscal consolidation. The article highlights the issues related to such departure.

Important departure

• With its fiscal deficit at 9.5% of GDP for FY21 and 6.8% in FY22 Budget for 2021-22 seems to signal “spend like there is no tomorrow”.
• For well over a decade-and-a-half, we have tried attaining deficit targets set out in the Fiscal Responsibility and Budget Management (FRBM) Act (2003).
• In this Budget, target of FRBM Act has not been adhered to.
• The Budget thus marks an important departure from one of the key tenets of the Washington Consensus that was based on macroeconomic stability.
• In previous years, Medium Term Fiscal Policy cum Fiscal Strategy Statement would give the indicators for the past two years as well as the projections for the next two years.
• In this year’s Budget, the yearly projections are missing.
• The Finance Minister has promised to introduce an amendment to the FRBM Act to formalise the new targets.

The theoretical basis for departure

• The Economic Survey laid the groundwork for a departure from rigid adherence to fiscal consolidation. 
• It has a quote from economist Olivier Blanchard, “If the interest rate paid by the government is less than the growth rate (IRGD), then the intertemporal budget constraint facing the government no longer binds.”
• The “intertemporal budget constraint” means that any debt outstanding today must be offset by future primary surpluses.
• The Survey argues that in India, the growth rate is higher than the interest rate most of the time. 
• The Survey says that, in the current situation, expansionary fiscal policy will boost growth and cause debt to GDP ratios to be lower, not higher.

Key concerns

• An important factor for adhering to the fiscal constraint in the past was the fear that the rating agencies would downgrade India if total public debt crossed, say, 10%-11% of GDP.
• That is a risk that cannot be wished away unless the rating agencies have decided to toe the IMF-World Bank line on fiscal deficits.
• Another concern is that a large fiscal deficit can fuel a rise in inflation.
• A third concern is that, with the tax to GDP ratio not rising as expected, the sale of public assets has become crucial to reduction in fiscal deficits in the years ahead. This is a high-risk strategy.
• A large-scale privatisation almost always involves substantial FDI.
• In South East Asia and Eastern Europe, privatisation of banks meant a large rise in foreign presence in the domestic economies.

Consider the question “The Budget 2021-22 is characterised by its departure from the path of fiscal consolidation. Examine the theoretical basis for such departure. What are the key concerns?”

Conclusion

If the nation’s political economy came in the way of our meeting the FRBM targets, it is also likely to pose an obstacle to large-scale privatisation. A departure from fiscal orthodoxy is welcome. But the government needs to think of ways to make it more sustainable.

Back2Basics: Interest Rate Growth Differential

• • A key indicator of an economy’s long-run debt sustainability is the differential between interest paid on government debt and the economy’s nominal growth rate.
  • When the cost of raising debt is lower than the gross domestic product (GDP) growth rate, public debt comes with low fiscal costs.
  • In such a situation, the debt-to-GDP ratio of the economy declines as debts are rolled over.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now

The budget could be an opportunity to increase the consumption which has been impacted by the pandemic and still continues to show the declining trends.

Continuing decline in consumption

• The first advance estimates of GDP for 2020-21 are much better than the earlier market consensus.
• The demand side, however, continues to be in a decline with private consumption falling by 9.5 per cent and its share in the overall GDP reducing by full 100 basis points.
• Per capita private consumption has contracted by 10.4 per cent, while capital formation has contracted by 14.5 per cent, with imports and exports also contracting.
• Only government consumption remains in positive territory.

What should be the growth in nominal GDP for 2021-22?

• In terms of specific numbers, the average growth in nominal GDP for the decade ending in 2013-14 was 15 per cent, but the average GDP deflator at 7.6 per cent far outpaced average real GDP at 6.8 per cent.
• For the six year period ending in 2019-20, average nominal GDP growth was 10.4 per cent, with real GDP growth of 6.8 per cent far outpacing the GDP deflator at 3.6 per cent.
• It is thus extremely important that we ensure that the current inflation trajectory is kept under control through policy interventions.

Policy recommendations for the farmers

1) Changing condition for renewal of loan on Kisan Credit Cards

• Out of the outstanding bank credit of about Rs 12 lakh crore to the agriculture and allied activities sector, Rs 7 lakh crore is for Kisan Credit Cards.
• The KCC portfolio of banks is under stress over the years due to a variety of factors like crop losses, unremunerated prices, debt waivers and the rigidity of the KCC product.
• Currently, the renewal of KCC loans with payment of both principal and interest ensures interest subvention.
• It is proposed that for renewal of KCC loans of small and marginal farmers and for loans of other categories of farmers for amounts up to Rs 3 lakh, the payment of interest must be a sufficient condition for renewal as with other loans.
• The above measure has the potential to reduce the credit cost for banks considerably on KCCs as NPAs can be prevented more easily and the interest rate on KCC loans can be further reduced.

2) Formalise tenancy and provide credit to tenant farmers

• There are 11.5 crore farmers who are PM-KISAN beneficiaries — 6.5 crore farmers have KCC.
• Thus, the remaining 4-5 crore could be land owning cultivators and at least 3-4 crore of such could be tenants/lessees/landless.
• Currently, such tenant farmers are not formalised into the credit deliveries of scheduled commercial banks.
• As of now, it requires state interventions for tenancy certificates which is only available in Andhra Pradesh.
• Formation of a SHG model under the Deen Dayal Antodoya Yojana will formalise tenancy even without formal documentation of tenancy.
• This will enable formal lending to take place to three crore landless farmers.

3) Increasing investment in health and education

• For health, it government could introduce medical savings account with a defined scheme to deduct interest from the savings account and pay towards a Mediclaim policy.
• For the record, the size of the health insurance is Rs 32,000 crore and the savings bank interest is Rs 1.15 lakh crore.
• The government should also consider exempting all retail and health insurance products from GST.

Three suggestions on the fiscal situation

• First,Withdraw all tax appeals.
• Second, accept all domestic arbitration decisions against government departments/agencies.
• Third, clear all outstanding dues to all parastatal agencies within a stipulated time.
• This will be a milestone structural administrative change that could be even thought of as a one-time balance sheet entry recognising liabilities and paying them off.
• As a consequence, we could jump multiple positions on the Ease of Doing Business rankings.

Conclusion

By implementing these steps in the budget the government could use this opportnity to stimulate the economy and aid the economic recovery.

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now