Is Declining Debt Enough?

THE CENTRE has brought down its debt (internal and external), one of the key fiscal parameters, by a good 3.1 percentage points from last year’s Budget promise of 59% of gross domestic product (GDP) to 55.9% (revised estimate or RE). In FY24, it is estimated to climb up marginally by 0.3 percentage points to 56.2%. This is commendable when compared with the 15th Finance Commission’s “indicative” path of 61% for FY23. However, government has a long way to go before it can bring the number below the Fiscal Responsibility And Budget Management (FRBM) Act’s cap of 40%.

This is not surprising. Central government’s debt has traditionally remained high. It averaged 49.5% in seven fiscal years before Covid-19 forced government to borrow more to support the economy, taking it 10 percentage points up from 50.9% to 61% in FY21 and forcing the 15th Finance Commission to increase the target to 61% for FY23 and 60.1% for FY24. But external borrowings of 1.8% of GDP in FY23 remain a bright spot. These are estimated to touch 1.7% in FY24, way below 2% in FY21. This is a big relief given the depreciating rupee and rising interest rates in U.S.

India’s debt surge in FY21, however, wasn’t exceptional. It matched the global rise in debt in 2020 from 54% to 64% of GDP, the highest rise since World War II. In OECD countries, central government borrowings rose 16 percentage points as they spent more to support their population and businesses–their stimulus was nearly 24% of GDP compared with India’s 1.6% of GDP.

However, a closer look at Budget numbers throws up several red flags.

Fiscal/Revenue Deficits

Taking on debt to spend is important to push growth during periods of demand stagnation or recession. Even before the pandemic struck, the Indian economy was facing challenges as GDP growth slipped from 8.3% in FY18 to 3.7% in FY20. Despite comparatively lower fiscal spending during Covid-19 and focus on supply-side solutions (lowering of interest rates, liquidity infusion), Centre’s fiscal deficit went up from 4.7% of GDP in FY20 to 9.2% in FY21, indicating fiscal stress.

As the pandemic wanes and economic activity picks up, government is trying to lower fiscal deficit, but is nowhere near meeting the FRBM target. Though it has met the FY23 Budget target of 6.4% of GDP and is targeting 5.9% for FY24, these numbers are way higher than the FRBM limit of 3%. The overshooting of the FRBM cap is part of a long-term trend, though. The average fiscal deficit during FY14-FY22 was 4.6%. The 15th Finance Commission’s indicative path was 5.5% for FY23 and 5% for FY24.

The interest outgo, 3% of GDP on average in past decade, touched 3.4% in FY23. In FY24, it is budgeted to climb up to 3.6%. Of the total expenditure, interest outgo was the largest component at 22.5%, and is expected to touch 24% in FY24. This should be a cause for concern.

But there is some relief on the revenue deficit (gap between actual and projected income) front. The deficit, which went up to 9.5% of GDP in FY21 from average of 4.4% in previous seven fiscals up to FY20, fell to 4.1% in FY23, less than 6.7% projected in the FY23 Budget. In FY24, it is expected to fall to 2.9%. These are below the 15th Finance Commission’s indicative path. The primary deficit, the gap between fiscal deficit and interest outgo on debt which is key to boosting demand and growth, fell from 3.3% of GDP in FY22 to 3% in FY23 (BE). It is expected to fall to 2.3% in FY24.

Worrying Capex and Growth Signs

Debt and deficit numbers show Centre may have performed reasonably well but what is it doing to boost growth? And is it enough?

Budget documents show that FY23 capex spending is 2.9% less than target. Total expenditure is 6.1% more than budgeted because of higher revenue expenditure. Since capital expenditure has a bigger multiplier effect than revenue expenditure, a higher capex is called for, especially when growth is expected to fall from 8.7% in FY22 to 7% in FY23 and 6.4% in FY24 (mid-point of 6-6.8% projection in Economic Survey FY23). Controller General of Accounts data shows that by end of December 2022, actual capex was 65% of budgeted, less than 70% in corresponding period of previous fiscal. Thus, the Budget’s promise of 37.4% higher capex in FY24 over FY23 (RE) should be taken with a pinch of salt, even though the rise in allocation is a healthy sign.

“The Budget claims a 33% rise in capex from ₹7.5 lakh crore to ₹10 lakh crore. If we take the combined capital expenditure of Union government through its ministries and departments, and that of public sector entities, the increase is only 22%, from ₹12.2 lakh crore to ₹14.9 lakh crore. Some revenue expenditures such as FCI's ₹1.45 lakh crore, oil PSUs' ₹30,000 crore and ₹1.30 lakh crore loans to state governments are masking as capital expenditures. The real capex, excluding these, is much smaller,” says former finance secretary Subhash Chandra Garg. In fact, at 4.9% of GDP, combined capex for FY24 is the same as in FY20.

Arun Kumar, former JNU professor, points at another facet of central government’s financial management. “Budgetary expenditure in FY24 is 7.5% more than FY23’s revised Budget estimate. This is less than projected 10.5% growth in nominal GDP in FY24. The implication is that if some expenditures rise dramatically, for instance capital intensive railways and highways, other expenditures for marginalised sections such as food and fertiliser subsidies and MGNREGS would have to be curtailed. For stimulus to economic growth, budgeted expenditure should rise more than nominal GDP.”

There is another aspect to the capex debate. For past one year, Centre has sold its capex push as a panacea of growth that will “crowd in” private investment. The claim, also made in Budget speech and Economic Survey FY23, is exactly opposite of neoliberal economics India has been following since mid-1980s. The neoliberal economics posits that government investment will “crowd out” private investment and, hence, seeks a “small state.” The reason for this change in focus is that private investment has fallen. From a peak of 16.8% of GDP in FY08, private investment (GFCF) fell to 9.2% in FY21, the last fiscal for which data is available. Private GFCF remained below 12% of GDP for the entire decade of FY12-FY21. This is despite corporate tax cut in 2019 that cost Central government ₹1.45 lakh crore in 2019 and now production-linked incentive schemes. The tax cut, in fact, led to a loss of ₹1.84 lakh crore in FY20 and FY21, according to a parliamentary panel. This means less money at Centre’s disposal and higher debt and deficits.

Even the rise in credit outflow to industry, which both RBI and Economic Survey FY23 cite to claim revival of private investment, is misleading. RBI data shows credit growth to industry has fallen from 7.5% in FY22 to 4.4% in FY23 (April-November 2022). During FY08-FY18, the share of industry in non-food credit averaged 42%. This fell to 27.8% during FY19-FY22 and 25.9% in FY23 (April-November 2022). There has been a marginal rise in credit outflow to non-food sector from 8.7% in FY22 to 8.9% in FY23 (April-November), but this is because of rise in personal loans for consumption expenditure, not credit flow to ‘real’ sectors like agriculture, industry and services. In fact, personal loans overtook large industry and services (in amount) in FY20 and industry in FY21. The trend continued in FY22 and FY23. Agriculture’s share has been stuck around 12-13% since FY08.

Finance minister Nirmala Sitharaman promised “a prosperous and inclusive India” in “her first budget in Amrit Kaal.” But key economic indicators don’t suggest this. First advance GDP growth estimates for FY23 bring bad news. GDP growth is expected to fall from 8.7% in FY22 to 7% in FY23 and further to 6.4% in FY24 (or 10.5% nominal growth). The estimates also show per capita GDP growth falling from 7.6% in FY22 to 5.8% and per capita consumption (PFCE) from 6.9% in FY22 to 6.6%. These numbers also show that growth in per capita income and consumption are below GDP growth. Consumption (PFCE) has been stagnant at 57% of GDP during FY21-FY23. These are not healthy signs despite Centre’s reasonably good performance in keeping debt and deficits under control.