21 Budgets of Fiscal Prudence

MyGov Team
17 Feb 2023

A less-emphasized fact regarding the recent budget was that this was the 21st complete budget to be presented by a government that was presided over by Narendra Modi. This trivial fact is not so trivial as it provides us with a prism into the economic or, rather, fiscal framework that has been guiding his policies over the last two decades.

The 2023 budget is significant in the sense that this budget comes before Modi seeks a fresh mandate – his third as India’s Prime Minister. It will be his 6th election seeking a mandate as an elected head of a government in India. These budgets are important to understand if there is a political cycle to fiscal policies that have emerged during his tenure.

A political cycle for fiscal policies can be thought of as an expansion in the fiscal budget around the time of elections by the incumbent government in an effort to increase the performance of the governing party. Several giveaways, freebies, or “revadis” are offered using state funds to entice people and influence their political choice. Indian politicians have frequently used such policies, and incumbent governments across states have been known to have created such a political cycle.

A good example of these fiscal cycles would be the 2008 budget, where substantial fiscal resources were directed towards revenue expenditures and fiscally profligate schemes such as a farm loan waiver. The 2008 farm loan waiver was, incidentally, announced prior to the 2008 financial crisis, and the crisis gave some cover to the then government to justify their fiscal policies. A more recent example was the continued use of fiscal tools through much of the early 2010s, even as the economy warranted a more prudent set of economic policies. Many of these policies were focused on revenue expenditures and disregarded prudence as a principle. There was very little interest in evaluating the impact of fiscal spending on revenue expenses even as the economy entered the Fragile 5 group largely as an outcome of macroeconomic irresponsibility.

States that borrow to spend on capital expenditures such as hard infrastructure or use that money to add capacity for the provisioning of public goods tend to see a higher growth rate. This higher growth rate should ultimately lead to a reduction in budget deficits over time. Modi’s five budgets around the time of elections display this intuitive understanding.

Such fiscal prudence was on display in the present budget, which continues with fiscal consolidation by reducing the deficit to under 6 percent at 5.9% while simultaneously focusing on capital expenditures. Most economic analysts and commentators recognized and appreciated this fact. But a less appreciated fact is that this has been a continuous trait of budgets presented by Narendra Modi-led governments, be it in Gujarat or at the Center.

In 2007, Gujarat’s fiscal deficits actually decreased, not just in terms of the GDP but also at absolute levels. That is, in 2006–07, Gujarat had a deficit of 6165.02 Rs crores. It was estimated to be Rs 5994.19 crores in the 2007-08 budget. Between the 2011 and 2012 budgets, the fiscal deficit remained barely unchanged at 1.9 to 2.0 percent. However, the state of Gujarat actually registered a primary revenue surplus in 2011 and 2012. This is a great example of how CM Narendra Modi invested in the infrastructure of Gujarat while keeping the fiscal situation well under control.

In terms of key budget ideas, the 2007-08 budget was farsighted as it introduced an e-budget for the first time in the country. The budget was prepared entirely online. The move was one of the first steps towards a paperless budget. Incidentally, India moved towards a paperless budget in 2020, and the last three budgets have been paperless.

Similarly, the big infrastructure push that we witness today is a natural extension of the Gujarat days of Modi. In the 2012–13 budget, the Modi government allocated Rs 133 crores for the Ahmedabad–Dholera expressway.

In addition, a scheme that can be viewed as a precursor to the Ayushman Bharat scheme was introduced for the poor of Gujarat by the name of “Mukhya Mantri Amritam,” which provided up to Rs 2 lakh in assistance for the treatment of serious illnesses in people who were below the poverty line.

The 2012-13 budget ended up providing a relief of Rs 410 crore for the common man, and it coincided at a time when Gujarat was registering one of the highest growth rates in the country even as India’s growth rate was declining while India’s overall inflation in 2012 was in double digits. As a result, at a time when India was still dealing with macroeconomic vulnerabilities, CM Modi used the budget to deliver solid economic fundamentals.

Even in the aftermath of the pandemic, the government did not lose its long-term perspective on fiscal resources, and it continued with its commitment as custodians of both taxpayer funds and the money borrowed in the future. The funds were devoted to productive spending, as has been the case throughout his 21 years of heading a government. Such consistency often stems from conviction; this is one quality in Narendra Modi that politicians would do well to learn from.

Author of this blog is Mr. Karan Bhasin, he is a New York based economist.





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