A Budget that Signals Growth with Stability
Context:
- According to an economic survey that was provided to Parliament prior to the introduction of the budget for 2023–24, India has achieved a remarkable broad-based recovery to return to the level of income that existed before the advent of the new coronavirus epidemic.
Growth and the fiscal deficit’s shadow:
- The conflict between Russia and Ukraine, the sanctions the West imposed on Russia in response, the slowdown and recession that occurred throughout much of the world, the rise in inflation that caused sharp increases in interest rates, the flight of capital, and pressure on the exchange rate were all shocks that came after the pandemic, which was the initial shock.
- Although the economy has recovered and income levels have surpassed pre-pandemic levels, GDP is still drifting 7% below pre-pandemic levels, therefore growth must be supported by stronger public investment.
- Because the overall budget deficit (Centre and States) and inflation remain above the upper tolerance limit, which is between 9% and 10% of GDP, macroeconomic stability necessitates ongoing fiscal consolidation.
- As a result, the government must choose between reducing the fiscal deficit and accelerating growth by increasing public investment. When interest payments make up 40% of the Center’s net revenues, there is little space for complacency.
- The Finance Minister pledged in the 2020–21 Budget to bring the fiscal deficit down to 4.5% by 2025–26. As a result, during the next three years, the deficit must be reduced by 1.9 percentage points. Accordingly, it is anticipated that in 2023–2024, the fiscal deficit will drop to 5.9%.
A balancing act:
- The Finance Minister’s decision to enhance infrastructure spending while maintaining financial restraint has required careful balancing. The trend of increasing funding for infrastructure projects has continued under her leadership, and the budgeted capital expenditure is increasing from 2.7% of GDP to 3.3%. Private capital investment should increase as a result of the substantial “crowding in” effect of capital expenditures.
- The depressing investment climate should be improved by capital expenditures, which, according to the Reserve Bank of India, have a multiplier effect of 1.2. The investment environment should continue to improve and the nation’s total investment-to-GDP ratio should stop declining with deleveraged balance sheets and a rise in commercial lending by banks.
- Additionally, continuing to offer States an interest-free loan to supplement their capital expenditures should encourage States to boost their capital investment. If infrastructure spending rises as anticipated, the Economic Survey’s 6.5% growth rate for 2023–24, which was widely seen to be overly optimistic, might actually materialise.
Grouping of subsidies:
- It is recommended that the fiscal adjustment be made mainly by limiting revenue expenditure, which, if put into practise, will increase the standard of public expenditures. Just 1.2% more money than originally planned is set aside in the budget for revenue expenditures in 2023–24. The amount of subsidies has been greatly reduced.
- The estimated reduction in the fertiliser subsidy from 2.87 trillion to 1.87 trillion will be 90 000 crores. With the end of the Pradhan Mantri Garib Kalyan Ann Yojana (PMGKAY), which began dispensing 5 kg of foodgrains beginning in April 2020 in addition to the foodgrains distributed under the National Food Securities Act, this policy was already formed in December 2022.
- Similar to this, it is expected that the subsidy for fertiliser will be cut by 50,000, primarily as a result of declining fertiliser prices. Additionally, it is predicted that funding for programmes supported by the central government will drop by about 20,000 crore, but that the overall transfer to the states will stay the same at 3.3% to 4.0% of GDP.
Taxation:
- On the tax side, customs tariff changes have been made, but the underlying protectionist stance has not changed. There have been attempts to induce taxpayers to move to the new system of personal income taxes, which includes lower rates and no tax credits. However, the increase of the tax bracket structure raises several concerns. It could have been better to move to the new tax structure with fewer brackets.
Conclusion:
- This Budget is typically well drafted, but how effectively it is implemented will determine how effective it is.
