Wages of inequality: The income-growth gap
- The interim Union budget presented on February 1 offers insights into the government's macroeconomic policy objectives.
- It is amidst impending general elections.
- It prompts a critical examination of the government's approach vis-à-vis the challenges confronting the Indian economy.
Budgetary Overview
- The budgeted total expenditure stands at Rs 47.8 lakh crore,
- Indicating a modest 6.1% increase over the revised estimates for 2023-24
- Marking the lowest increment in two decades.
- The capital expenditure witnesses a substantial rise of 16.9% to Rs 11.1 lakh crore, albeit less than the previous year.
- Excluding interest payments on government debt, revenue expenditure experiences a marginal decline of 0.8%, contrasting with a sharper contraction of 3% in the preceding year.
- Adjusting for a presumed inflation rate of 5%, total expenditure appears largely stagnant
- With non-interest revenue expenditure decreasing by 5.5%.
- The budget is continuing the trend of shifting expenditure composition towards capital expenditure.
Fiscal Policy Framework
- The current fiscal policy framework rests on dual objectives:
- Debt-to-GDP Reduction:
- Aiming to lower the debt-to-GDP ratio
- Aligning with the targeted ratio of 40% set by the FRBM review committee.
- Significantly lower than the present 58%.
- Mitigating Expenditure Reduction Effects:
- Striving to counter the adverse impact of expenditure reduction on GDP growth,
- primarily by transitioning expenditure composition from revenue to capital expenditure.
Addressing Debt-to-GDP Ratio
- Reducing the debt-to-GDP ratio entails managing two key factors:
- Growth Rate vs. Interest Rate:
- The ratio hinges on the gap between GDP growth rate (g) and the interest rate (r).
- A higher g relative to r results in a lower ratio.
- Primary Deficit-GDP Ratio:
- Dependent on the excess of expenditures net of interest payment over non-debt receipts,
- Aiming for a lower primary deficit-GDP ratio to reduce the debt ratio.
Policy Implications and Challenges
- The reduction of primary deficit to GDP ratio.
- Structural change prompting employment generation.
- Promoting employment and income dynamics mutualism.
- Analysing and correcting structural employment shift.
- Income distribution concerns.
Conclusion
- The interim budget's analysis underscores the imperative of aligning fiscal policies with broader developmental objectives
- It emphasises the need for sustainable debt management
- Alongside initiatives to foster inclusive growth and employment generation.