With the BJP-led government exuding over-confidence on the state of the economy, the interim Budget presented earlier this month has shifted focus to fiscal consolidation. Finance Minister Nirmala Sitharaman has projected that the fiscal deficit; which was expanded to 9.2% of GDP in 2020-21 to deal with the pandemic-induced recession; would be brought down to 5.8% by the end of the current financial year and 5.1% by next year to reach the targeted 4.5% of GDP by 2025-26.

The interim Budget signals significant cutbacks in public expenditures, slashing effective capital expenditure by ₹1 lakh crore and reducing welfare and subsidy allocations. Despite a nominal GDP growth of 9%, down from the previous year’s 10.5%, the government faces challenges with a slowdown in economic activity. Real GDP growth stands at 7.3%, above last year’s 7.2%, while the IMF questions the accuracy of official growth estimates, recommending statistical upgrades. The fiscal situation is complicated by rising debt liabilities, marking a formal withdrawal of post-pandemic stimulus in the interim Budget.

Added to this is the prospect of a slowdown in economic activity, regarding which the government seems to be in denial. Despite the nominal GDP growth rate falling to 9% in the current year from 16% last year, real GDP growth (at constant prices) has been estimated at 7.3% (advanced estimates), slightly above the 7.2% registered last year, implying that the value of the GDP deflator — which should correspond with the retail inflation rate — has fallen below 2% in 2023-24. Official data, on the other hand, shows the monthly average of consumer price inflation (Consumer price index-CPI-combined) at 5.5% for 2023-24.

This anomaly has once again revived the debate over the accuracy of official growth estimates. The International Monetary Fund (IMF), in its latest staff report on India (November 2023) has pointed out several defects and deficiencies in real sector data, particularly that of national accounts, employment, and prices, recommending an upgradation and expansion of official statistics. It is noteworthy that in its January 2024 Update of World Economic Outlook, the IMF has projected India’s real GDP growth as 6.7% for 2023-24 and 6.5% for 2024-25, reflecting a deceleration of economic activity.

Budget and Public Finance

The Finance Minister has sought to divert attention from this debate over the present direction of change in economic activity, by presenting a “White Paper” in Parliament on the past twenty years. The white paper alleges that the United Progressive Alliance (UPA) had left behind a “deeply damaged economy” marred by “governance, economic and fiscal crises” in 2014, which is claimed to have “turned around” and “rebuilt” from its foundations in the past 10 years by the National Democratic Alliance (NDA) regime. The evidence presented in support of this macroeconomic narrative, however, is a concoction of cherry-picked data, half-truths, evasions, and counter-factual assertions. The 55-page document mentions the word “inflation” 34 times, while the word “jobs” and “employment“ is mentioned twice, and “unemployment” never at all; which exposes the skewness of its analysis.

Over the past 20 years, fiscal trends show no clear pattern between UPA and NDA regimes (See Table 1). NDA-I reduced expenditures as a percentage of GDP, while NDA-II increased spending significantly post-pandemic. NDA-II’s expenditure record is mixed compared to UPA, with improvements in certain areas but declines in others. The NDA-I government had reduced expenditures relative to GDP on most major heads compared to the UPA regime, including capex, subsidies, defence, education and rural development. NDA-II increased the outlays on those heads significantly vis-a-vis NDA-I. However, the expenditure record of the NDA-II government vis-a-vis the UPA era remains mixed; outlays on capex, food subsidy, agriculture, and urban and rural development improved, while outlays on education, defence and subsidies on fuel and fertilizer fell, as per cent of GDP. Health expenditure as a share of GDP saw no change at all between the UPA and NDA rule, despite the pandemic.

On the revenue front, gross tax revenues in GDP showed minor improvement during the NDA rule compared to UPA’s, but non-tax revenues deteriorated. Overall there was a decline in the Centre’s revenue receipts as a share of GDP, partly due to the increase in the State’s share in Central taxes following the implementation of the 14th Finance Commission recommendations.

NDA’s revenue mobilisation strategy revolved around increasing indirect tax collections on one hand, through GST rollout and levying high excise duties on petro-products and expanding the income tax base on the other. Central Board of Direct Taxes (CBDT) data show that the number of individual income taxpayers with positive tax payments increased from 1.25 crore in 2012-13 (assessment year) to 2.08 crore in 2021-22 (assessment year). The average tax paid per individual income taxpayer more than doubled from ₹91,200 to ₹2.03 lakh in 2021-22. This raised income tax revenues from the UPA years’ annual average of around 2% of GDP to 2.3% under NDA-I and 2.9% during NDA-II.

In sharp contrast, however, corporate tax collections fell as a share of GDP, from the UPA era average of 3.5% of GDP to 3.3% under NDA-I and further to 2.8% under NDA-II. Aggregate income tax collections are projected to surpass corporate tax collections by over ₹1.13 lakh crore in 2024-25.

CBDT data show the number of companies paying positive taxes rising from 3.45 lakh in 2012-13 (assessment year) to 4.57 lakh in 2021-22 (assessment year). Yet, data from the “Statement on Revenue Impact of Tax Incentives under the Central Tax System”, annexed with the Receipt Budgets, show that the effective corporate tax rate, which inclusive of the dividend distribution tax had risen from 24.2% in 2012-13 to 30.4% in 2018-19, had fallen sharply to 22.2% in 2020-21.

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The withdrawal of the dividend distribution tax and sharp reduction in the corporate tax rate through the new tax regime introduced in 2019-20, have led to massive revenue losses under the NDA-II government, whose estimates the government has suppressed till date. Such a revenue mobilisation strategy, while transferring income from the poor (through enhanced indirect taxes) and middle classes (through income taxes) to the profit-making corporate sector, besides exacerbating income inequality, has also failed to generate adequate revenues at a time when public expenditure was being enhanced under NDA-II, following the onset of the pandemic and recession.

As a result, the revenue deficit has eventually bloated to an average of 4.3% of GDP under NDA-II and the fiscal deficit averaging at 6.6%, raising the central government’s debt from 52% of GDP at the end of UPA rule and around 50% under NDA-I to the current level of 58%. Annual interest expenditure has also risen from the low of 3.0% earlier to 3.6% of GDP in the current period, which the government is now trying to reckon with, by slashing capex, subsidies and welfare expenditure in the interim Budget.

It is also noteworthy, that despite the enhanced level of resources transferred to the States in the past 10 years, combined debt of the State governments have grown faster than that of the Centre under the NDA rule than the UPA era. This underlines the inadequacy of current level of fiscal transfers to the States, given their expanding expenditure commitments.

Growth and inflation

Official data on the real economy under the NDA regime has been criticised from several quarters for overestimating its own macroeconomic performance and undervaluing that of the UPA regime. Even then, the simple truth which is evident from the official data is that on average, real GDP growth was at least one percentage point higher during the UPA decade than that of the NDA (See Table 2). Not only did the deep slump following the pandemic and lockdown cause major disruption during NDA-II, but slowdown in the economy was already evident under NDA-I after the successive policy shocks of demonetisation and GST rollout. The UPA era had also witnessed the global financial crisis and consequent worldwide recession in 2008-09, which was also a major external shock.

Gross value added (GVA) growth in basic prices also reflect the same trend as real GDP, with the average growth rate first rising during UPA I, then falling during UPA II, rising again in the NDA I period and then falling sharply during NDA II. Most importantly, the ten years of NDA rule could not provide any break with the sectoral pattern of growth witnessed during the UPA era. Agricultural growth remained way below the overall GVA growth rate, with its share in overall GVA falling continuously. With the share of manufacturing and industrial sectors remaining largely the same under UPA and NDA periods, the services sector’s share in GVA increased from below 48% in 2008-09 to over 54% in GDP. The Make in India initiative launched by the NDA, to transform India into a “global manufacturing hub”, could not succeed in altering the services-led growth trajectory.

Real investment and export growth was significantly higher during the UPA decade than the NDA’s, which explains the cause of higher real GDP growth during the former regime, despite being interrupted by a global recession. Private investment (GFCF) as a share of nominal GDP during the UPA decade remained significantly higher than the later period. In contrast, growth during NDA-I was private consumption led. During NDA-II’s tenure, even real private consumption growth fell significantly, making economic growth largely dependent on the fiscal stimulus. This is clearly borne out by the rising fiscal deficit and debt-GDP ratio under NDA-II.

UPA’s growth record, although higher than NDA’s in magnitude, had three major problem areas, which the Finance Ministry’s “White Paper” has highlighted. What is missing though is an honest appraisal of how far the NDA regime has been able to address and resolve them.

The most problematic aspect of UPA era’s growth process was the high inflation that accompanied it, particularly the double digit food inflation (Table 2). The new series of CPI data reflect a sharp decline in the overall consumer inflation rate by the end of NDA-I’s tenure to 3.4%, but a resumption of the inflationary trend under NDA-II, averaging around 6% annually. As was the case with the UPA regime, NDA too has relied upon the Reserve Bank of India to try and control inflation by raising its policy interest rate and managing liquidity.

Despite the repo rate being hiked from 4% in mid-2020 to 6.5% in February last year, where it has been held till date, the headline inflation rate has stubbornly ranged between 5-7% in the past two years, with average food inflation crossing 7% in 2023-24. This demonstrates, as it did during the UPA era, that RBI’s repo rate adjustments have very little influence on food price movements in India.

The National Democratic Alliance (NDA) regime has done little to address the major supply side factors driving food inflation, beyond imposing ad hoc export bans. While cash transfer schemes like PM-Kisan or the distribution of free foodgrains to poorer households can provide much needed income support and relief, they can neither improve agricultural productivity nor modernise storage and marketing of food items like vegetables, pulses and cereals, whose prices are driving food inflation today. The only method conceived by the NDA to address these issues was to facilitate a wholesale corporate takeover of India’s food and agricultural economy by enacting three farm laws in September 2020, which had to be eventually rescinded following a year-long protest by north Indian farmers. Since then, the NDA-II government has remained as clueless as the UPA (United Progressive Alliance)-II was, in dealing with food inflation and agriculture.

The second problem with UPA’s growth story was that while exports grew rapidly, imports grew even faster, partly due to rising global crude prices, which worsened the current account balance and increased external vulnerability. During the NDA regime, both export and import growth declined, which impacted economic growth adversely but improved the external trade balance. Further, during the NDA decade, net FDI inflows increased as a share of GDP but remittance inflows, which remained significantly higher than net FDI inflows, declined compared to the UPA decade. The end-result has been mixed.

The fall in India’s foreign exchange reserves during NDA-I could be reversed during NDA-II, but the rupee has continued to depreciate vis-a-vis the dollar. The rupee-dollar exchange rate, which fell from ₹43 to ₹60 per dollar during the UPA rule has fallen further to ₹83 during NDA’s tenure. In the context of the post-pandemic surge in global inflation last year, the rupee depreciation has only imported the inflationary trend into the domestic economy.

The problem of NPAs

The third problem with UPA’s higher growth and private investment phase was that it led to rising big ticket corporate defaults, initially concealed through debt restructuring, which ultimately left a huge pile of legacy Non-Performing Assets (NPAs) in the banking system. The Modi government is claiming credit for restoring the health of Public Sector Banks (PSBs) by reducing the Gross Non-Performing Assets (GNPA) stock significantly. The fact remains that while cumulative NPA reduction under the NDA rule through all recovery channels, including the Insolvency and Bankruptcy Code was around ₹10.8 lakh crore (till March 2023), NPA write-offs have amounted to over ₹14.8 lakh crore in the same period.

The PSBs, which accounted for over ₹10.65 lakh crore of these NPA write offs had to absorb substantial losses because of NPA provisioning, making net losses between 2017-18 and 2019-20. Simultaneously, since 2017-18 massive doses of capital was infused into PSBs and financial institutions like the EXIM Bank, the Industrial Development Bank of India (IDBI) and the India Infrastructure Finance Company Limited (IIFCL), in order to bail them out. As disclosed in the Receipt Budgets, the Centre’s total debt burden on account of these recapitalisation bonds have increased to ₹2.90 lakh crore by 2023-24, and their annual interest expense of over ₹19,000 crore is being met through the central government’s revenue expenditure since 2019-20. Bank recapitalisation under the UPA rule, which was of a much smaller magnitude, was audited by the Comptroller and Auditor General of India (CAG), covering the period between 2008-09 to 2016-17. However, bank recapitalisation executed under the NDA rule has not been audited by the CAG so far. Such an audit is necessary to evaluate the massive NPA write offs by the PSBs and conclude whether private sector debt defaults have been subsidised through the public exchequer.

Income and employment

The efficacy of Union Budgets needs to be judged in terms of their impact on the lives of ordinary people. The Finance Minister has claimed in the Budget speech that under NDA rule “people are living better and earning better, with even greater aspirations for the future. Average real income of the people has increased by fifty per cent.” However, how true is this claim? Official data shows that real per capita income in India, estimated by the inflation-adjusted Net National Income (NNI), registered a growth of 50.3% during the ten years of UPA rule. During NDA’s ten year rule, real per capita income grew by 43.6%, reflecting a slowdown in inflation adjusted income growth across India.

The NDA government often cites the annual Periodic Labour Force Survey (PLFS) findings to claim a reduction in the unemployment rate between 2017-18 and 2022-23. However, comparable estimates from the NSS 68th round on Employment and Unemployment Situation in India, shows that unemployment rates, estimated by both current weekly status and adjusted usual status, grew very sharply between 2011-12 to 2017-18.

Moreover, while the unemployment rates declined between 2017-18 and 2022-23, the open unemployment rates of 2022-2023 were still higher, not only vis-a-vis the NSS 68th round of 2011-12, but compared to all the eight previous NSS rounds conducted since 1972-73. The open unemployment rates have never been so high in India in the last 50 years. Unemployment was particularly high among the urban youth aged 15 to 29 years and among those with an educational level of secondary and above. Within those employed, the share of casual workers show a declining trend both in rural and urban areas, while the proportion of self-employed have increased progressively. In 2022-23, self-employed workers and helpers in own account enterprises made up 63% of the rural labour force and almost 40% of the urban labour force. The share of regular wage/salaried workers has declined in rural areas and increased in urban areas between 2017-18 and 2022-23. However, the share of those without any social security benefit has increased within the salaried workers category.

Even as agriculture’s share in Gross Value Added (GVA) has declined to 14.4% in 2023-24, there has been an increase in the share of workers engaged in agriculture between 2017-18 and 2022-23. The share of workers engaged in informal non-agricultural enterprises has also increased since 2011-12. These trends in employment status from the PLFS data point towards growing informalisation of the labour force, contrary to official claims of increased formalisation.

Skilled but not employed

The Finance Minister had claimed in the Budget speech that the government’s “Skill India Mission” has trained 1.4 crore youth and 54 lakh youth have been up-skilled and reskilled. However, the dashboard in the official site of the PM Kaushal Vikas Yojana shows that out of 1.10 crore certified candidates, only 24.51 lakh, that is around 22%, have been “Reported Placed”. Such excess supply of skilled workers in the economy and growing informalisation is working as a dampener on wage and earnings growth. PLFS data further show that the average earnings of casual labour in non-public work to be ₹8,547 in 2022-23, that of self-employed workers to be ₹13,347 and that of regular wage/salaried workers to be ₹20,039. While casual labourers’ average earnings has grown by around 49% in five years since 2017-18, and regular wage/salaried workers by 19%, average earnings of self-employed workers rose by 8.5% only in five years. With annual retail inflation rate averaging 6% during NDA-II’s tenure, less than 2% annual growth in average earnings for the self-employed clearly indicate a decline in their real earnings. 57% of India’s labour force engaged in self-employment, are certainly not “living better and earning better”, as the Finance Minister would want us to believe. It is their hopes and aspirations that stand betrayed.

Prasenjit Bose is an economist and activist; Indranil Chowdhury teaches economics at PGDAV college, DU; Samiran Sengupta and Soumyadeep Biswas are data analysts at CPERD Pvt. Ltd.