Sanjeev Ahluwalia | Sane budgeting vital for a world becoming crazy

Update: 2025-01-27 18:40 GMT
Sanjeev Ahluwalia | Sane budgeting vital for a world becoming crazy
With ambitious growth targets and limited means, India grapples with rising debt, fiscal deficits, and the need for targeted investments. (PTI File Image)
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India has a budgeting problem, like any middle-class household. Aspirations are larger than means, possibly, driven by the doubtful glory of being the fourth largest economy and, politically primed, future expectations of becoming a “developed” country by 2047. Coddled by obliging import tariffs, clunky private corporates are risk averse and the financial sector dominated by public sector banks and institutions.

Protected MSMEs and agriculture are low productivity and supply low value-add, low wage jobs. This leaves public investment to bear the brunt of investment, spiking the fiscal deficit and debt beyond sustainable levels.
The social media obligingly spreads exaggerated achievements and projects a dazzling future, generating impossibly high public expectations, to meet which meagre resources are rationing widely. Expectedly, the completion time for projects gets extended, increasing completion costs and reducing the value-add from incomplete investments. Unsurprisingly, the cost of project overruns is estimated at Rs 4.8 trillion per annum or about 20 per cent of the original project cost.
Like any modern middle-class family, India borrows to meet the resources gap. To its credit, India has abided by the metrics of credit worthiness. First, it has never defaulted on debt repayments. Second, fiscal rules bind both the Union and state governments’ expenditure to limit borrowing. How long this restraint lasts in a world desperately trying to bolster growth but drowning in debt, remains uncertain.
Global government debt increased much more in emerging markets (EM) over 2010 to 2023 (from 44 per cent to 69 per cent of GDP) than in advanced economies (AE) — (105 per cent to 112 per cent of GDP). Public debt in China increased from close to the EM average in 2010 at 44.3 per cent to 84.3 per cent in 2023. Public debt in India in 2010 was already higher than the EM average at 65.6 per cent and increased further to 81.6 per cent of GDP in 2023. Are we hoping that the mirage of developed status by 2047 can rub off on us today and allow us to borrow as an AE does? China too is well above the EM public debt level but, crucially, unlike us, it also has per capita income close to high income economies whilst ours is towards the bottom of upper middle-income economies as per World Bank norms.
What would cutting back public debt levels imply? First, new borrowing must be less than debt repayments. Second, GDP must grow rapidly at least two percentage points above the average level of 6.5 per cent, where it is today, to reduce the debt to GDP ratio. Third, the investment push for growth must come from monetisation and disinvestment of public assets, foreign, and domestic private investment. To become a China-Plus-One or an America-Plus-One destination, all foreign investments must be welcome along with binding advance-tax guidance and contracts conforming to international best practice, to reduce investment risk. Budget 2025 could usefully remove the artificial tax preference for investment in equity as opposed to debt, so that middle class savings are more balanced. Deepening close RBI oversight by over irresponsible bank/FI lending is crucial.
Maintaining fiscal deficit (FD) norms gives credibility to the government’s resolve to be fiscally prudent to cheer up investors. In 2017 the outside limit for the Centre’s fiscal deficit was increased from three to four per cent of GDP, pushing the combined FD (Union and states) to seven per cent of GDP from six per cent earlier. Over the last four decades the outside norm of seven per cent was adhered to in 14 fiscal years between 1984 to 2017 (spanning both UPA and the early Modi 1.0 period) — so was this just a shift in the goalpost to fit the actual? It seems so because the older FD “norm” of six per cent of GDP was met only four times in fiscal years 1983, 2007, 2008, and 2018. The Covid-19 related fiscal deficit spike took the general FD to 13.1 per cent in 2020-21. Despite the epidemic waning, higher FD remains high at around 7.9 per cent (3+4.9).
It’s no surprise then that the RBI finds it difficult to drive inflation “back into the forest” or to reduce interest rates to stoke growth. Since 2016 the RBI’s primary task is to manage inflation within a 2-6 per cent band, with four per cent as the median. Inflation was higher — between 7.5 to 10 per cent since 1981, except in two five-year periods when it was four per cent (2001 to 2005; 2016 to 2019, both under NDA governments), reverting thereafter to an average of six per cent. Inflation declined from 6.21 per cent in October 2024 to 5.22 in December 2024. But it remains above the four per cent norm while the upside risks have multiplied. Is this metric statistically sound? An NCAER 2024 report recommends reducing the share of food in the CPI to 40 per cent from 48.5 per cent because higher incomes diversified the consumption basket. Rationalising the food share can reduce inflation statistically. Appearances matter when one is competing globally for capital.
Budgeting for growth means eschewing “prestige projects” (rebuilding Parliament stimulates vanity, not growth), minimising “pork” (freebies for the party faithful to enhance vote share) and to focus spending on projects with the highest value-add potential. Targeted spending requires current and accurate data, which means improving the quality of Indian statistics. The Centre must resist being a fiscal supermarket, where all supplicants find relief. Central allocations should focus narrowly on national physical and digital networks, making banks more competitive, incentivising corporate investment in space applications, agricultural and industrial R&D and market development, and leave vote-catching “ease of living” components — affordable homes, drinking water supply and sanitation, cheap energy supply, municipal and rural development, culture, social welfare, city management to state governments.
The Union government is bloated. In 2017-18, when the railway budget was merged with the Union Budget, there were 73 major schemes. By 2024-25, the number of major schemes, each with an allocation of over Rs 10 billion, had more than doubled to 170. Those below Rs 10 billion are additional. Each scheme imposes additional administrative costs and disperses funds in discrete pockets, reducing the efficiency of the use of funds. Beware of the negative dynamics of centralisation.
Disbursing Central funds under generic frameworks, leaving branding and scheme specifics to state governments, is a better option. In the age of startups, tapping growth opportunities is easier, if those closest to where the rubber meets the road are fiscally and administratively empowered, rather than just the head office.



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