Drilled down to its basics, a budget, whether of the government or a household, is essentially the same. It must balance expenditure on one hand with receipts or income on the other. But there is one key difference. Governments have an inalienable right to print money.
So while anyone may borrow to spend in excess of one’s financial inflows, in theory, there is no limit to how much governments can borrow, as they can always create money to repay. If this is overdone, of course, it has harsh consequences: currency debasement caused by inflation being one, mounting public debt being another.
This places a huge onus on elected governments, especially in poor democracies like ours. We have limited resources, but the demands on them are virtually unlimited.
Populist pressures, combined with the ever-rising need to spend on sectors that cannot be left to private investment, such as defence and other strategic fields, infrastructure, basic education, primary health and so on, mean finance ministers have a tough job making financial allocations.
Finance minister Nirmala Sitharaman too must address the clamour for more funds with the limited means at her disposal. As is to be expected in a developing country, tax revenues and other non-loan receipts are woefully short of demands on the exchequer, leaving the FM with no option but to borrow. The key question is how much.
Critically, how much more debt can be taken on without putting the economy’s long-term fiscal health at jeopardy? Or, what is the sustainable fiscal deficit (the gap between the Centre’s inflows and outflows)? Thankfully, we have a road-map.
Given the danger of governments running outsized fiscal deficits, Parliament placed fetters on government spending by means of the Fiscal Responsibility and Budget Management Act (FRBM) of 2003.
This law originally mandated the Centre to limit its fiscal deficit to 3% by 31 March 2008. Subsequent events, notably the global financial crisis of 2008-09, saw the target being repeatedly breached, which led to the setting up of an FRBM Review Committee in 2016. This panel called for a new goal of 2.5% to be achieved by 2022-23.
Unfortunately, covid intervened just when we seemed to be making some progress towards it, resulting in fiscal expansion once again. Since then, New Delhi has made concerted efforts to return to the path of fiscal rectitude. Under Sitharaman’s watch, barring the covid years of high expenditure, the deficit has steadily declined.
Now, with just a day to go before Sitharaman presents India’s final budget for 2024-25, her sixth, the question is whether the BJP-led government will eschew populist policies and stick to the fiscal straight and narrow. Or will ‘coalition compulsions’ dictate the contours of the budget?
On all indications, the FM intends to adhere to a fiscal glide path that aims for a deficit of 4.5% of GDP by 2025-26. But the budget is not only about balancing books. It is also about meeting the aspirations of people. It may be nigh impossible to “wipe every tear from every eye,” which India’s first prime minister Jawaharlal Nehru cited as Mahatma Gandhi’s ambition in his famous 1947 speech to mark our freedom.
However, given that economic stress and job disappointment may have played a role in recent poll results—and the prognosis that our dream of a ‘developed’ destiny by 2047 depends on every strata of society doing better—we can expect the FM to take on the challenge.
