A Dream Budget?

Nirmala Sitharaman's sixth essay was a perfect marriage of economic pragmatism and political sagacity. EPISODE #162

Dear Reader,

A very happy Monday and to you.

Last week Finance Minister Nirmala Sitharaman presented her sixth union budget and the last in this tenure of the National Democratic Alliance (NDA).

Contrary to expectations, given that the NDA is facing a two-term anti-incumbency, the vote-on-account did not have the hint of a freebie. Instead, in a speech lasting less than an hour, the FM showcased the NDA’s track record in development.

And, then very calmly signalled that the NDA will be back to present the full budget in July. This week I try to unpack this year’s vote-on-account.

Luckily I was part of the panel to interview the finance minister for Doordarshan, immediately after the presentation of the Union Budget. Needless to say it was an honour and privilege to hear the FM’s candid assessments on the Budget. Will share the link below.

The cover picture of the finance minister entering Parliament on Budget Day armed with her iPad is sourced from the Press Information Bureau.

A big shoutout to Gautam, Ranjini, and Premasundaran for your informed responses, kind appreciation and amplification of last week’s column. Once again, grateful for the conversation initiated by all you readers. Gratitude also to all those who responded on Twitter and Linkedin. 

Unfortunately, Twitter has disabled amplification of Substack links—perils of social media monopolies operating in a walled garden framework. I would be grateful therefore if you could spread the word. Nothing to beat the word of mouth.

Reader participation and amplification is key to growing this newsletter community. And, many thanks to readers who hit the like button😊.

---

Modinomics

Like I told you last week, no finance minister in recent memory has approached a union budget, leave alone a pre-election effort from an incumbent facing a two-term anti-incumbency, in such relatively stable macroeconomic circumstances. The missing populist rhetoric in the run-up to the pre-election budget made this a double whammy for the FM.

Given this fiscal leeway there were expectations, including in this newsletter, about Finance Minister Nirmala Sitharaman sharing some giveaways in what is an election year vote-on-account. But this year’s budget had none of it.

Instead the FM stayed committed to the path of fiscal consolidation—in fact improving on the glide path to achieve a fiscal deficit target of 4.5% of gross domestic product in 2025-26—while renewing the government’s commitment to expand the footprint of development.

This could mean two things.

One, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) was signalling a delinking of polls from the Budget.

In recent history we have examples of political expediency trumping fiscal dharma—the best example being the massive Rs60,000 crore farm loan waiver announced by the Congress-led United Progessive Alliance (UPA) little under a year ahead of the general election in 2009. In this instance, the NDA opted to claim the high moral ground and also keep its fiscal gunpowder dry.

Second, it could mean that the NDA is convinced—especially in the absence of populist rhetoric in the run-up to this year’s general election—that the political opposition can be overcome on the basis of its work in office over the last decade, particularly with respect to delivering social welfare.

Haseeb Drabu, the former finance minister of Jammu and Kashmir and also the guest for the upcoming episode on Capital Calculus show on StratNews Global this week, believes it is a structural shift.

Sharing a teaser below.

Whatever may be the case, this convergence of fiscal prudence with a political vision that runs against convention, checks the boxes for a budget that puts country first. Hence, my temptation to dub it the ‘Dream Budget’.

Checking the Boxes

I am aware that last time the media ascribed a similar moniker to P Chidamabaram’s effort in 1996-97, it did not pan out well.

Pranab Mukherjee in his book, summed it up well:

“Unfortunately, the dream budget did not remain so.

Though it did not exactly morph into a nightmare, in the course of the year it was found that many of the projections of revenue receipts and expenditures were off the mark and did not conform to targets that were taken into account while preparing budgetary calculations.

Consequently, there was a decline in the rate of growth and employment generation, coupled with rising inflation.”

While one can’t forecast the future, it is safe to say that the FM has checked all the requisite boxes to ensure the projected outcomes are realised. Given this government’s track record in coming clean, especially with respect to off-the-book transactions—including the legacy they inherited—I would extend them the benefit of doubt.

The fiscal mantra for example is based on simple yet logical principles, and reasonable assumptions.

Importantly, the annual forecast for revenue and expenditure are indexed to the country’s economic growth. Nominal economic growth is projected to grow at 10.5% in 2024-25, while revenues are forecast to increase by 11.5%—consistent with prevailing trends (check the graphic below)—and the rise in expenditure is estimated to be less than 10.5%.

Indeed, if revenues grow faster than economic growth and expenditures, there is every reason to believe the FM’s fiscal math will hold up.

A key assumption is that economic growth will be sustained. Since external agencies, including multilateral institutions like the International Monetary Fund (IMF) and the World Bank, investment banks and domestic institutions like the Reserve Bank of India (RBI) also concur, we can safely assume this assumption on economic growth is a fair claim.

There are also some upsides that may accrue in the expenditure budget for next year. One example would be the outgo on fertilizer subsidy. The spurt in international prices forced up the subsidy bill as the domestic price for the farmer is capped. The outgo was Rs2.51 lakh crore in 2022-23 and Rs1.89 lakh crore in 2023-24 (Revised Estimates).

Prices have since started to decelerate. And this expected relief has manifested itself in a lower fertilizer subsidy outlay of Rs1.64 lakh crore for 2024-25.

Further, this vote-on-account maintains the continuity in government spending on capital expenditure, even as it makes the bet that the private sector—which accounts for bulk of capital spending—is beginning to kick-in.

The good news is that state government’s, who have been incentivised with grants in aid, have joined the party. Exactly, why effective capital expenditure is poised to reach a historic high of 15% of GDP.

Check out the graphic below.

FM’s Take

Many other queries that come to mind were answered by the FM in the post-budget interview I mentioned in the introduction.

Do watch a recording of the telecast which happened on 1 February. Sharing below.

Poll Talk

Like I said in the introduction, this vote-on-account will also stand out for the audacious claim of winning a record third term—a phenomenon last witnessed immediately after Independence when Jawaharlal Nehru led a government for three consecutive terms.

Replying to a query in the post-budget interview the FM said the NDA did not need populism to win voters. Instead their work would speak for them, she added. A day later, addressing the Mobility Conference in New Delhi, her boss, PM Modi delivered the same message even more explicitly.

Check out the video below.

In the final analysis it is clear that this year’s vote-on-account has many firsts. To me, the stand out feature was the attempt to delink the Union Budget from elections by not falling to the temptation of offering freebies just weeks ahead of the general election being called.

Hopefully, it is a signal of new beginnings.

---

Recommended Viewing/Reading

Sharing the latest post of Capital Calculus on StratNews Global.

The World Bank recently released its annual tracker on global remittances for 2023. It showed that globally remittances at $669 billion were higher than forecast. India, like always, was the top recipient with $125 billon—accounting for little under fifth of the global remittances in 2023.

According to the World Bank, a distinctive feature of remittances to India is the shift away from blue-collar workers to white-collar workers based in Europe, Australia, Singapore and the United States.

To unpack this trend, Anil Padmanabhan spoke with the always insightful Rituparna Chakraborty, co-founder of TeamLease.

Sharing the link below. Do watch and share your thoughts.

Till we meet again next week, stay safe.