COMMENTS ON BUDGET 2023-2024

March 11, 2023
9:21 pm

The budget is in accordance with Modi’s political economics witnessed since 2014. I shall analyze the budget under the following major heads:

Demand, private investment and exports.
Capital expenditure.
Reduced focus on social welfare programs.
Education and healthcare.
New tax regime.
Unemployment and price rise.

Demand, Private Investment and Exports

Domestic demand is responsible for approximately 60 percent of the GDP. Modi’s policies of helping the rich and breaking the backs of the rural economy, poor and MSMEs have created vast disparities in the distribution of wealth and as a consequence domestic demand continues to be low. Low domestic demand has adversely affected private investment as also the inflow of FDI. Since the global demand is low, efforts to promote exports are unlikely to get much success. The policies of reduction in corporate tax as also the PLI scheme have improved the profit margins of the big corporates but failed to increase the desired private investments. Thus, growth and unemployment problems are acute and the government is unable to do anything about it, except hope for the following:

Improvement in rural economy on the basis of a good rabi crop harvest, particularly wheat, thereby increasing domestic demand.
Public capital expenditure crowds in private investment.
Exports pick-up.
MSMEs revive by God’s grace and the genius of entrepreneurs.

Capital Expenditure

Since the major growth engines of the economy are failing because of the past poor policies the only thing left with the government is to generate growth through capital expenditure. Capital expenditure is a highly reliable growth tool and has a good multiplier effect as well. The reality, however, is something like this:

In 2022-23, against a BE of Rs 7,50,246 crore the RE will fall to Rs 7,28,274 exposing the entrenched weaknesses in execution of government projects. Ignoring the constraints and the absorptive capacity of the ministries (e.g., railways and roads), the FM has allocated Rs 10,00,961 crore.
According to Pronab Sen, a substantial part of this increase in capex has happened by reducing the capex of PSUs. Second, the Rs 1.3 lakh crore going to the states as 50-year loans may not be an increase in capex but simply a change in the source of its funding. Third, some of this Rs 10 lakh crore may not be capex at all depending upon how BSNL and BPCL utilize the Rs 83,000 crore, which is 8.3% of the Rs 10 lakh crore, allocated to them. It is quite possible that these two companies may utilize this as budgetary support rather than capex. Fourth, professor Sen says that it is almost certain that perhaps up to 50% of the 2.4 lakh crore allocation to the railways and the 1.62 lakh crore for highways may not be used at all and could return to the government.
He said that this 10-lac crore figure serves two purposes:

o It captured headlines and gave material to the Godi media to go gaga over Modi’s genius. Modi loves big headlines. Remember the fraud 20 lac crore stimulus package announced during Covid.

o Since a large portion of it is unlikely to be spent, it will provide a cushion for increase in MNREGA as also fertilizer subsidies, while still keeping the fiscal deficit around 6% of the GDP.

Reduced Focus on Social Welfare Schemes

Poverty alleviation programs have been given short shrift in Budget 2023. The most important among them is MGNREGA, whose allocation has been cut to Rs 60,000 crore. The actual expenditure in 2021-22 was Rs 98,468 crore and the expected expenditure in 2022-23 is Rs 89,400 crore. The total allocation for the National Social Assistance scheme, ‘Anganwadis’, the National Livelihood Mission and nutrition programs has stagnated at less than Rs 60,000 crore. As a ratio to GDP, the allocation for the above anti-poverty programs has declined from 0.79 per cent in 2022-23 to 0.53 per cent. The other two major programs are the drinking water and housing programs with an overall allocation of Rs 1.5 lakh crore and an increase of 13 per cent from the revised estimate of 2022-23, but still below the budget estimate of 2021-22.

The allocation for agriculture and allied sectors, including PM-KISAN, is Rs 1.4 lakh crore, lower than the budget estimate for 2022-23. The food subsidy has been cut by 31 per cent from Rs 2.87 lakh crore to Rs 1.97 lakh crore and the fertilizer subsidy by over 22 per cent from Rs 2.25 lakh crore to Rs 1.75 lakh crore. The allocation for food procurement and market intervention has been reduced from Rs 72,000 crore to Rs 60,000 crore.

Education and Healthcare

The education and health sectors have seen a marginal improvement from the budget estimates for 2022-23, but are totally inadequate in terms of the requirement. As a ratio to GDP, the allocation for education has witnessed a steady decline during the NDA regime, from 0.63 per cent in 2013-14 to 0.37 per cent in the present budget. India is on course to be the third largest economy, but we will continue to be at the bottom in terms of the quality of life of people.

New Tax Regime

I found the views of P Chidambaram, former FM, on the subject the best. I am reproducing an edited version of his editorial in the Indian Express here:

In Budget 2023-24, the government sweetened the New Tax Regime (NTR) and exhorted tax-payers to switch over from the Old Tax Regime (OTR). The FM said that her five announcements will “primarily benefit our hard working middle class.”

The FM did not define the middle class. Her government, however, has defined the economically weaker sections (EWS) and notified that families earning a gross annual income below Rs 8,00,000 would fall under EWS. It was based on a report by the Ajay Bhushan Pandey Committee. We may assume that those falling under EWS are poor.

Who is Middle Class?

Another study by PRICE (People Research on India’s Consumer Economy) found that 31 per cent of households have an annual income of between Rs 5 lakh and Rs 30 lakh and they could be classified as the middle class. That’s about 28 crore households. A household may have only agricultural income or it may consist of more than one income-earning person but not all may be income tax filers or payers. In 2017-18, the Income tax department disclosed that 1,47,54,245 persons returned an annual income of Rs 5-10 lakh and 45,08,722 persons returned an annual income of Rs 10-25 lakh. The total is about 2 crore persons. The number may have increased since.

For our purpose, we need to know how many income tax filers disclose an annual income of Rs 8 lakh to Rs 30 lakh. My rough estimate, based upon the various data points, is a maximum of 3-4 crore persons. The FM claims to have given relief to them under the sweetened NTR.

Cracking the Math

Several newspapers have published tables (on February 2) containing calculations of tax liability for different levels of income under OTR and NTR and up to what level is the OTR more beneficial.

According to The Indian Express, the OTR is more beneficial – with less tax liability – up to an income level of Rs 15 lakh. (The table stops there). The Hindu puts it at Rs 35 lakh. The Economic Times puts it at Rs 60 lakh. Other newspapers have carried similar tables. For senior citizens and super senior citizens, the OTR

is markedly superior at these levels. The government has not contradicted any of these reports or tables.

I have before me an Excel Sheet prepared by a chartered accountant at Ahmedabad. It shows the salary income, standard deduction, professional tax, deductions under Sections 80C and 80D, and deduction for interest paid (Rs 2 lakh a year) on a housing loan. At every level of income up to Rs 30 lakh, the OTR is more beneficial. If the assessee has business and other income, the OTR is more beneficial up to an income level of Rs 10 lakh and the tax liability becomes equal at levels of Rs 15 lakh to Rs 30 lakh. The consensus appears to be that the OTR is more beneficial for the middle class, as defined. The government’s argument that the middle-class taxpayer will pay less tax under NTR is demonstrably wrong.

Goodbye Savings?

However, the more important issue is whether, from a tax payer‘s point of view, is it prudent and beneficial if the tax payer ‘saves and spends’ or ‘only spends’. The importance of household savings in developing countries is universally acknowledged. There is little or nil social security provided by the government to the vast majority of Indians. Therefore, for 75 years, the government stressed the importance of household savings. Household savings and corporate savings are the core of private capital which can be tapped for investment. It is not natural for individuals to save; they have to be motivated to save. Hence, the government, through tax exemptions, encourages individuals (and corporates) to save in specified instruments or assets.

The BJP government has turned the prevailing philosophy on its head. The government is implying that spending is good for the country’s economy. I do not question the need for people to spend, but spending must be balanced with savings. ‘Save & Spend’ is a far better advice than ‘Spend as if there is no tomorrow.’

Under OTR, the assessee will pay less tax and strike a balance between savings and disposable income. Under NTR, the assessee will have a larger disposable income but no savings.

The government’s intention — no longer concealed — is to move to a no-exemption regime. I believe in a ‘low-tax, few exemptions’ regime that will encourage savings and leave enough disposable income to spend. Besides, a strict no-exemption regime must have low taxes. Under Budget 2023-24, the marginal rate of tax under OTR is 42.7 per cent and under NTR it is 39 per cent. These rates expose the myth of a low-tax regime.

Thank goodness, the government has left the choice to the taxpayer, but for how long?

Unemployment and Price Rise

The government does not speak about unemployment and price rise. The increase in capex will not drastically increase employment. The formal sector can only employ not more than 14-15% of the workforce. 86% of the workforce has to be engaged in the informal sector. Modi has no plans to generate employment, other than flimsy false promises.

High inflation is a global phenomenon. Modi has decided to tax the masses rather than the rich, through high taxes on oil and gas and reduced subsidies. Thus, price rise is also a reality which will continue. A very good Rabi harvest can have the twin benefits of reducing prices and improving domestic demand. This, sadly has nothing to do with Modi’s political economics. I join my readers in praying for a good Rabi harvest and good monsoons. Good luck!

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