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  • Quickonomics
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February 10, 2023

Quickonomics: Budgetary capex at the cost of welfare spend? Not quite

Union Budget 2023-2024 has brought a renewed capex thrust by the government – the largest in 15 years at that — to a record 4.5% of GDP, with sectors such as railways, highways and petroleum benefiting the most.

 

The capex support to growth gives reason to cheer as growth is expected to slow next fiscal, with slowing global growth hurting exports, the one-time demand effect seen in contact-based services domestically expected to slow, and rising interest rates likely to pinch demand in certain segments.

In pursuit of higher capex

 

 

To be sure, with fiscal consolidation also an imperative amid slowing revenue growth, it was far from easy to create room for capex.

 

The budget did so by axing revenue spends. To wit, effective revenue expenditure (revenue expenditure excluding revenue grants given for capex) drops from a peak of 14.4% of GDP in fiscal 2021 to 10.4% in fiscal 2024, which is nearly on a par with the pre-Covid ratio.

 

There are undisputed cuts in allocation for food and fertilizer subsidy, where lower prices and modifications in the free food scheme are reducing the government’s expenses. But there are also some perceived trade-offs to rural welfare support spends.

 

During the pandemic, despite the agriculture sector being exempt from stringent lockdown-related restrictions, the spread of the virus and fear amid supply chain and demand shocks impacted employment in the sector. Many workers left cities and returned to their villages, increasing demand for rural jobs.

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