Why Union Budget 2023-24 has its Priorities Upside Down

The mainstream media, citing a slew of financial elites, has been lauding Union Budget 2023-24. They say it is excellent for expanding capital expenditure, pursuing fiscal prudence, and boosting the consumption drive of the salaried middle class and wealthy. And they are congratulating the finance minister for not “handing out” populist election “sops” or “freebies”, i.e., not raising welfare expenditure on the social sector. What the euphoric responses forget is the class position of the financial elites. Their arguments favour policy decisions that serve their interests and aggressively reject all other policy prescriptions, especially ones that support the peasants and working classes.

The budget plans to step up the capital expenditure by 33.4%. This increase is mainly due to the allocation to the ministries of railways, roads and highways, and defence services, which account for 66% of the capital expenditure. Yet it is touted as a multiplier that will take the economy to a higher growth path. Asset creation is expected to lead to employment creation, but mainly indirectly, through crowding in private investment. But flattering reports neglect the actual contraction in public expenditure as a percentage of GDP—from 15.33% in 2022-23 to 14.92% in 2023-24. This fall almost matches the fall in the fiscal deficit from 6.4% to 5.9% of GDP for both years.

Without significantly raising total public revenue (excluding borrowings and other liabilities) as a percentage of GDP, the budget merely changes the structure of public expenditure in favour of the capital account. Meanwhile, actual public expenditure as a percentage of GDP has declined. What we get is a contractionary fiscal policy stance amid a slowdown. It is bound to negatively impact aggregate demand and employment directly or via the multiplier effect.

Moreover, the assumption of crowding in private investment by reducing production costs and raising profits has limited validity. For, private sector investment activity mainly depends on future profit expectations, which, in turn, depends on an uptick in demand. The capex focus relies significantly on augmenting the supply side to raise output and employment. When real consumption expenditure growth is sluggish, an investment-centric growth strategy will prove unsustainable as unutilised production capacity may pile up. We may witness unrecovered loans that threaten financial stability, ultimately ending any chance of recovery.

The K-shaped post-pandemic recovery has hampered domestic demand and household consumption. Considering the emerging recessionary pressures, it is natural for people to expect the budget to try and push up purchasing power and create jobs. What they got instead is a shift towards capex with lower allocations for welfare. The 33% budget cut (compared with revised estimates for this financial year) for MG-NREGS is not alone. The budget also features a 31% food subsidy cut and a 22% cut in the fertiliser subsidy. In 2023-24, the amount budgeted for social sector expenditure is Rs 8.28 lakh crore, while the revised estimates in 2022-23 were Rs 8.84 lakh crore. As a percentage of total public spending, social expenditure has fallen from 30% in 2020-21 to 18% in 2023-24.

The budget has justified favouring capital over social sector expenditure on the grounds that the former has a higher multiplier effect for employment and output. But the underlying logic is puzzling. As economies slow down, capital expenditure becomes unsustainable. Boosting social expenditure can encourage domestic demand and prod the private sector to invest in creating productive capacity. Besides, the extent to which capital expenditure can be a multiplier can be lower than the ability of social sector expenditure to create jobs. This is because the latter has a higher dependence on domestic demand. Conversely, the employment effects of capex may benefit other nations and not just the domestic sector.

Another challenge before India is the low savings rate combined with sluggish consumption expenditure growth. Higher social sector and welfare expenditure can, in this circumstance, encourage consumption at the bottom 90% of the population, while the top 10% population (in income terms) must be encouraged to save more. Generally, those with low incomes have a higher propensity to consume, and earning more relates to a higher propensity to save. These tendencies could have been nudged to achieve a higher savings rate alongside higher consumption growth. This year’s budget strategy is exactly the opposite. It urges taxpayers towards a new tax regime by reducing tax rates and doing away with exemptions, whose primary purpose was to incentivise savings. It also reduces the highest surcharge (levied on the highest income bracket) from 37.5% to 25%. So, it wants to boost the consumption of high-earning taxpayers by reducing welfare spending. These measures will suppress the potential consumption of the majority of Indians, whose incomes are low. A minuscule number (roughly the wealthiest 5%) is in the taxable category, which means this strategy will have limited success. Meanwhile, there will be a very significant fall in the potential consumption expenditure of ordinary Indians.

Removing tax exemptions and combining this with a tax benefit can have a less favourable effect on aggregate demand and a negative impact on the savings rate. The alternative scenario, in which high-income earners are taxed and low-income earners gain from welfare programmes, would create more positive effects on employment and aggregate demand. This is how the government should have fuelled consumption. Ultimately, its current strategy will fail to achieve higher consumption expenditure growth or a higher savings rate.

Furthermore, the commodity basket of those with higher incomes includes more luxury items, while those in the lower income brackets spend more on necessities. Therefore, not just the composition, the labour intensity of goods in the respective commodity baskets also varies. Needs tend to be more labour-intensive than luxuries, with obvious implications for sustainable job creation. India’s tax system has become increasingly regressive over the last decade or so. Stagnant revenue generation from direct taxes has increased the reliance on indirect taxes. It is considered regressive because the tax burden disproportionately falls on lower-income families and individuals. A recent Oxfam report has highlighted that the bottom 50% of earners in India account for 64.3% of taxes collected on food and non-food consumption items. This year’s budget does nothing to change this inverted system, as it projects 48% of tax revenue will come from indirect taxes.

In all, this budget has failed to grasp the intricacies of taxation, consumption and growth. Alternative strategies that could have benefited the largest number of people and the economy have been ignored. It lacks a coherent vision and fails to address the burning unemployment issue. To this government, an expansionary fiscal policy focused on enhancing the purchasing power of the masses and reviving consumption demand disturbs the fiscal arithmetic. Nothing is farther from the truth. The government did not even try looking for other sources of direct tax revenue, such as wealth or inheritance taxes. These would be especially apt amid India’s enormous rise in income and wealth inequality. But the neo-liberal development strategy shaped by global finance capital is incapable of imagining alternatives that do not impose misery upon the majority. For them, it is impossible to distinguish stability from progress.

Vishwajeet Kadam is an assistant professor of economics at HPT Arts and RYK Science College, Nashik. Dipak Chaudhari is an associate professor of economics at Abhinav College of Arts, Commerce and Science, Bhayander, Mumbai. The views are personal.