Budget 2023: Government Should Set A Modest Fiscal Consolidation Goal, Says Sudipto Mundle
The government should set a modest goal for fiscal consolidation while focusing on boosting growth in the upcoming budget.
The government should set a modest goal for fiscal consolidation while focusing on boosting growth in the upcoming budget, according to Sudipto Mundle, chairman of the Centre for Development Studies.
"We'll need to do some fiscal consolidation in the coming budget, but we shouldn't be too gung-ho about it and push for it this year. Instead, wait for growth to pick up and stimulate, and then we can move on to series consolidation," Mundle, who is also a member of the 14th Finance Commission, told BQ Prime
Growth is actually faltering, he said, projecting it at about 5.2% for the next fiscal. Growth needs to be propped up, and at the same time, fiscal consolidation is necessary, so there will likely be some moderation in revenue in the next fiscal, he said.
"It's a very complicated picture," Munndle said. "Maybe fix a deficit reduction target of 0.5% of GDP for this year, which is 6.4%, and thereafter, in the medium term, get it down to 3%, eventually," he said.
Watch the full conversation here:
Edited excerpts from the conversation:
We saw the advance estimates for the current fiscal. How does the fiscal math look to you? Will the increase in tax revenues suffice to cover the increase in expenditures?
My guess is that because of the buoyant tax revenues that we've had across all categories of taxation, except for excise and customs because of the lower tax on fuel, they will in fact be able to cover their expenditure projections. There may be a small slippage, and I wouldn't worry too much about it.
States comprise a larger share of capex compared to the centre. Despite the centre's efforts to increase capex, states have cut capex. What's the solution?
Part of the problem is just a technical administrative matter. If you talk to the states, they will tell you that when they are making their budgets, they don't get to know how much the quantum of transfers from the central government will be. They get to know that much later in the year. So the time that they have to actually ramp up their spending is very limited, and that's part of the problem.
I think, if the central government gives them early signals at the time when they're making the budget, about what will actually be the flows from the centre, they will have a fairly good idea of how their own revenue mobilisation will go.
Something else that you've written in detail about is merit and non-merit subsidies. Several non-merit subsidies, like fertiliser subsidies, still remain high. So what's your outlook on these types of subsidies?
The central government has significantly reduced its non-merit subsidies, and the majority of them are now with the states. So there's not much room for further compression in the central government. The fertiliser subsidy is there, but there are other visible subsidies like food, which is a merit subsidy that you don't want to cut. They have done some rationalisation and it's fine.
The bigger expenditures on which rethinking is required are not subsidies but transfer payments, and some of those, especially something like MGNREGA, need to be sustained, and one should be more liberal on that friend, but there are others on which you might start wanting to economize.
Several times before, you have highlighted the need in the Indian economy to increase productivity. Can you elaborate?
Raising productivity is a very important issue, especially in the present context of our growing current account deficit. Normally, CAD at 2% of GDP is thought to be safe, but now we're looking at something close to 4%.
Now, the knee-jerk reaction here is to raise customs duties. That's just the wrong way to go because it creates an anti-export bias. A much more sensible thing would be to not fiddle around with customs duty changes but allow the exchange rate to switch expenditure from imports to exports.
In terms of policy, that is the way to go, but this will also not solve your problem unless you raise productivity within the economy in order to make Indian products actually competitive globally.
That is why raising productivity is absolutely critical. Also, that is not something that could happen easily unless you have an appropriately skilled workforce. We have a big problem with a low-skilled workforce, and they in turn cannot be skilled until we have a sound foundation of basic education. We are way behind our Asian competitors on these things. The new education policy, which was rolled out in 2000, can actually bring about very positive disruptive change but didn't have a chance because of the pandemic for two years. But going forward, expect some good things to happen on the education front, which will then produce better skills and therefore rise productivity.
What is your take on the current state of the Indian economy amid normalising growth and increasing global headwinds?
It's being said that we occupy a sweet spot in a global economy that's very troubled, with lots of headwinds and uncertainties and so on. I think that's true. But we also have big problems. As I said, inflation probably has peaked, but it remains elevated, growth is still faltering, and a revival has not yet happened, so we need to keep our focus on that and the current account deficit.
So these, I think, are the main policy priorities. Keeping that in mind, as we've already discussed, we'll need to do some fiscal consolidation in the coming budget, but we shouldn't be too gung-ho about it and push for it this year. Instead, wait for growth to pick up and stimulate, and then we can move on to series consolidation.