Editorial 1: India’s fiscal dilemma
Recent Context:
- The recently announced budget affords a good opportunity to take stock of the fiscal situation. Most obviously, because it is the last full budget before the 2024 elections.
- More importantly, because next fiscal is the first time in a long time that India’s economy might actually have a normal year.
- In 2019-20 came the NBFC crisis, 2020-21 saw the pandemic and 2021-22 the recovery, while 2022-23 witnessed global turmoil in the wake of the Russian invasion of Ukraine. It is only in the next fiscal that we can finally compare like with like, one “normal” budget with another.
- The budget has received mix response by the economic analysis as some areas of goodness and concern is also raised on certain areas of economy
The good news about the Budget:
- The good news is that in many ways the fiscal situation has proved resilient to the successive shocks.
- Tax collections as a per cent of GDP are actually marginally higher than they were in 2018-19. On the spending side, the composition has improved, as capital expenditure has soared from 1.5 per cent of GDP to a budgeted 3.5 per cent of GDP.
- And sizeable off-budget expenditures were brought back onto the budget two years ago in a major and laudable step to improve transparency.
- The fiscal deficit is now on a downward trajectory, budgeted to fall to about 6 per cent of GDP next year from a Covid peak of more than 9 per cent.
The economic areas of mixed development in the budget:
- At the same time, there have been some mixed developments, particularly on the revenue side.
- Personal income taxes have shown an encouraging rise, but this has been accompanied by increases in exemption limits, meaning that taxation is now resting on a narrower base of taxpayers, even as prosperity grows and spreads to the middle class.
- Meanwhile, the GST’s promise has not yet been realised, as its collection ratio has remained essentially the same as it was five years ago, largely because efficiency gains have been offset by repeated reductions in rates.
- Furthermore, corporate tax revenues have declined significantly, again because tax rates have been reduced, in this case more than offsetting the returns from the improved profitability and market share gains of large corporations (at the expense of the informal sector).
The raised fiscal areas on concern:
- First, there has been a notable increase in expenditures over the past five years. Here, one needs to be careful with the numbers because 2018-19 spending was understated, as certain transactions had been shifted off-budget.
- Even after this correction is made, however, the “true” increase in expenditure remains substantial, exceeding 1.5 percentage points of GDP. As a result, the structural fiscal deficit will amount to an uncomfortably large 6 per cent of GDP next fiscal.
- The run of large deficits since 2018-19 has necessitated large amounts of borrowing, which have pushed up interest obligations to the point where they now absorb nearly half of the centre’s tax revenues. As we showed in a piece with Olivier Blanchard, this exceptionally high ratio increases India’s fiscal vulnerability while also squeezing out important social expenditures.
- The second issue is centralisation.
- On the revenue side, the states will receive just 31 per cent of gross tax revenues next fiscal, compared with 37 per cent in 2018-19.
- This reflects the centre’s increasing use of cesses, which are not shared with the states, as well as the use of a considerable portion of tax collections (from the GST compensation cess) to repay the GST Council for the loans given to the states during the pandemic.
- A subtler form of centralisation is taking place on the expenditure side. Non-interest, non-subsidy current expenditure is being compressed, by a sizeable 1 percentage point of GDP in 2022-23 and a further 0.5 percent of GDP next year.
- How is this being achieved?
- Various mechanisms are at work, but a key one is that the centre is scaling back its transfers to states for various centrally sponsored schemes.
- Some of the reduction can be justified because the economy has recovered from the pandemic. And some of it is aimed at forcing the states to improve their efficiency, not just in their spending but also in the way they manage their funds.
- That goal is laudable, especially if the states can be made to reduce their egregiously wasteful power subsidies. But the consequence is a major pressure on state government expenditures
What does this mean for the fiscal performance of the country as a whole?
- We are not yet able to answer this question, because we don’t have current data for the states.
- But we do know a few things. For example, we know that despite the sharp increase in the centre’s capital spending, investment by the overall public sector has actually declined compared to 2018-19 because the states and especially public sector undertakings have reduced their outlays.
Conclusion/Way forward:
- In sum, despite the centre’s prudence in avoiding a major fiscal stimulus during the pandemic, the fiscal situation has weakened considerably over the last five years.
- The centre’s structural deficit is larger, overall debt has risen to an uncomfortably high 85 per cent of GDP, and interest obligations have increased to exceptionally burdensome levels.
- The centre needs to adopt consolidation strategy, however, relies heavily on centralisation, which has both limits and limitations.
- The limits are clear. Even under an optimistic scenario, where centralisation leads to a long-needed improvement in state government efficiency, there is only so much consolidation that can be achieved in this fashion. Then, the centre will need to find other ways to reduce the deficit to its target of 4.5 per cent of GDP.
- As for the limitations, if centralisation does not succeed in improving efficiency, it would simply result in a redistribution of resources from the states to the centre.
- In that case, states would either need to reduce the services they provide to their people. Or they would need to increase their borrowing, in which case the overall fiscal position might not improve at all.
- And all of this assumes that the finances will play out as foreseen in the budget as the 2024 elections approach. On the other hand, if they are affected by the broader nationwide trend of aggressively competitive populism the overall fiscal picture would worsen.
Editorial 2: What farm exports data show
Recent Context:
- India’s agricultural exports reached to scale a new peak in the financial year ending March 31, 2023. But so are imports, bringing down the overall farm trade surplus.
- Government data show the value of farm exports in April-December 2022, at $39 billion, was 7.9% higher than the $36.2 bn for the corresponding period of the previous year. At the present rate, the record $50.2 bn exports achieved in 2021-22 look set to be surpassed.
- However, equally significant are the imports of agri produce that, at $27.8 bn in Apr-Dec 2022, have grown 15.4% over the $24.1 bn for Apr-Dec 2021.
- As a result, there has been a further shrinking of the surplus on the farm trade account. The accompanying table shows that the surpluses even in 2020-21 ($20.2 bn) and 2021-22 ($17.8 bn) were lower than the $22.7 bn and $27.7 bn of 2012-13 and 2013-14 respectively.
What are the drivers of Export
- The two big contributors to India’s agri-export growth have been rice and sugar.
- India in 2021-22 shipped out an all-time-high 21.21 million tonnes (mt) of rice valued at $9.66 billion. That included 17.26 mt of non-basmati (worth $6.12 billion) and 3.95 mt ($3.54 billion) of basmati rice.
- In the current fiscal, the growth has been primarily led by basmati rice. Its exports have gone up by 40.3% in value (from $2.38 billion in April-December 2021 to $3.34 billion in April-December 2022) and 16.6% in quantity (2.74 mt to 3.20 mt) terms.
- The corresponding increases have been less for non-basmati exports: 3.3% in value ($4.51 billion to $4.66 billion) and 4.6% in quantity (12.60 mt to 13.17 mt).
- Sugar exports hit a record value of $4.60 billion in 2021-22, as against $2.79 billion, $1.97 billion, $1.36 billion, and $810.90 million in the preceding four fiscals.
- This fiscal has seen a further surge of 43.6%, from $2.78 billion in April-December 2021 to $3.99 billion in April-December 2022.
- India exports of rice and sugar are well on course to touch, if not top, $11 billion and $6 billion respectively in 2022-23. Marine products exports, too, are likely to exceed last year’s peak of $7.77 billion, having registered a marginal 2.7% jump from $6.12 billion in April-December 2021 to $6.29 billion in April-December 2022.
- However, exports of some big-ticket items have faltered or slowed. The value of buffalo meat shipments fell 5.1% from $2.51 billion in April-December 2021 to $2.39 billion in April-December 2022. So did spices: down 6.7% from $2.95 billion to $2.75 billion.
- While wheat exports have grown by 3.9% from $1.45 billion to $1.51 billion, they are unlikely to sustain or even reach the 2021-22 full-fiscal level of 7.23 mt ($2.12 billion), thanks to a poor crop and the ban on shipments imposed in May 2022.
What are the areas of import:
- More than a general export slowdown, it’s the growth in imports that should be cause for concern. This has come mainly from three commodities.
- The first is vegetable oils, whose imports shot up from $11.09 bn in 2020-21 to $18.99 bn in 2021-22, and even more during the first nine months of 2022-23 over the same period of last fiscal — from $14.04 bn to $16.10 bn or 14.7%.
- According to the Solvent Extractors’ Association of India, India’s total edible oil imports rose from 13.13 mt in 2020-21 to 14.03 mt in the 2021-22 oil year (Nov-Oct), and increased further by 30.9% from 2.36 mt in Nov-Dec 2021 to 3.08 mt in Nov-Dec 2022. Imports now account for over 60% of the country’s estimated 22.5-23 mt annual oil consumption.
- The second is cotton. India’s cotton exports reached an all-time-high of $4.33 bn back in 2011-12. It remained at reasonably high levels until 2013-14 ($3.64 bn), before plunging to $1.62 bn by 2016-17 and $1.06 bn in 2019-20. There was a recovery thereafter to $1.90 bn in 2020-21 and $2.82 bn in 2021-22.
- But during this fiscal, not only have exports collapsed to $512.04 million in April-December (from $1.97 billion in April-December 2021), imports have also soared from $414.59 million to $1.32 billion for the same period. In other words, India has turned from a net exporter to a net importer of cotton.
- The third commodity is cashew. During April-December 2022, imports have posted a 64.6% rise to $1.64 billion from $996.49 million in April-December 2021, even as exports of cashew products have plummeted from $344.61 million to $259.71 million for the same period. A similar trend has been witnessed in spices, with exports de-growing (from $2.95 billion to $2.75 billion) and imports edging up ($955.75 million to $1.03 billion).
The policy implications
- From the chart, it can be seen how closely India’s farm performance is linked to international commodity prices.
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- The UN Food and Agriculture Organization’s (FAO) Food Price Index — having a base value of 100 for the 2014-16 period averaged 122.5 points in 2012-13 and 119.1 points in 2013-14. Those were the years when India’s agri-exports were at $42-43 billion. As the index crashed to 90-95 points in 2015-16 and 2016-17, so did exports to $33-34 billion.
- The exports recovery in 2020-21 and 2021-22 happened along with — rather, on the back of — rising global prices and the FAO index averaging 102.5 points and 133 points in the two years.
- The FAO index peaked at 159.7 points in March 2022, just after the Russian invasion of Ukraine. Since then, it has fallen every month, with the latest reading of 131.2 points for January 2023 the lowest after the 129.2 points of September 2021.
Conclusion:
- Going by past correlation, one can expect this to lead to India’s farm exports slowing down in the months ahead. Moreover, this could be accompanied by increased imports, as was the case from 2014-15 to 2017-18. In the event, the focus of policymakers too, may have to shift from being pro-consumer (to the extent of banning/ restricting exports) to pro-producer (providing tariff protection against unbridled imports).
- Secondly, the government needs to do something about cotton and edible oils. India’s cotton production has declined from the high of 398 lakh bales in 2013-14 to a 12-year low of 307.05 lakh bales in 2021-22. Clearly, the effects of not allowing new genetic modification (GM) technologies after the first-generation Bt cotton are showing, and impacting exports as well. A proactive approach is required in edible oils as well, where planting of GM hybrid mustard has been permitted with great reluctance — and which is now a matter before the Supreme Court.