Between Growth and Fiscal Consolidation

BUDGET 2023-24 strategised a structural shift in favour of capital expenditure (Capex) to push growth. Government Capex is known to generate higher multiplier effects.

- D.K. Srivastava

The RBI has estimated the central government Capex multiplier at 2.4 in the first year and at an even higher level in the second year. An increase of 37.4 per cent has been budgeted for Government of India's (Gol's) Capex.

In addition, the Gol has incentivised the state governments to undertake Capex by providing them grants for capital asset creation amounting to 1.2 per cent of GDP, extending an interest-free loan for 50 years for Capex undertaken in 2023-24, and permitting them a fiscal deficit limit of 3.5 per cent of gross state domestic product (GSDP). However, alongside, Gol's investment through its public sector enterprises has fallen from 2.3 per cent of GDP in 2019-20 to 1.1 per cent in 2023-24 budget estimate (BE). Considering both investment expenditures together, the extent of the increase is much less, rising from 4 per cent of GDP in 2019-20 to 4.5 per cent in 2023-24 (BE).

We may recognise that the budget has supported demand through indirect channels as well. Some of these include the tax slab adjustment which may lead to an increase in disposable income especially in the lower middle-income segments and the crowding-in effects of the high government Capex which may boost private investment expenditure. It comes as a surprise that the effect of these growth stimuli is not reflected in Gol's assumption of the underlying nominal growth of 10.5 per cent for 2023-24. The budget has not taken a call as to the decomposition of this nominal growth between its real growth and inflation components.