Expectations from Budget 2023: Will it be populist or pragmatic?

Budget 2023 would be presented amid a gloomy global economic milieu due to recessionary headwinds. Despite exogenous variables, there is reason for cheer as India is rebounding at the fastest pace among major economies, with the World Bank’s growth projections for FY 2023-24 being 6.6 per cent, as compared to a downward revision of global GDP growth from 2.9 per cent to 1.7 per cent in 2023-24. Achieving any growth rate above 6 per cent is challenging and commendable, considering that 2022 witnessed the highest inflation in 50 years, the most aggressive monetary tightening cycle in nearly 40 years, the strongest US dollar in 20 years, and the most tepid Chinese growth in over 40 years. Other reasons for optimism stem strong domestic demand, continuing infrastructure driven investments by Government of India, deleveraged corporate financials, and improved asset quality of banks due to the resolution of large gross non-performing assets driven by the Insolvency and Bankruptcy Code which have lowered the NPA’s to -4 per cent expected in the coming fiscal. Last full budget before elections As this will be the last full budget of this government before the general elections in 2024, and with 10 states going to polls over the next year, the budget is likely to be a progressive mix of growth laced with populism. The finance minister (FM) is unlikely to reduce corporate tax rates any further, as it was last lowered in 2019. However, it will be a populist budget to the extent that the FM will likely focus on boosting farm income through sops and incentives, as rural India is home to 800 million people whose purchasing capacity is linked to farm output. Also, there are expectations of reducing personal income tax for the middle classes so as to lift demand. Expectations from budget 2023 Regarding expectations from the budget, importantly, one hopes that the FM resists the urge for premature fiscal tightening, and is expected to target a fiscal deficit of 5.8 per cent of GDP for 2024, as the economy needs greater resources for growth. Broadly, some of the dominant thematic thrusts of the budget will be to increase economic intensity by increasing outlays in areas that have the highest multiplier coefficients, as also have multiple backward and forward linkages. Therefore, the FM is likely to augment the supply and the demand side of the economy through: ~ Public capex will continue to power the Indian economy. Economists feel this support will be crucial next year when the Indian economy will face the full force of the global slowdown. It is likely that outlays will be increased from the current 2.9 per cent of GDP to near 3.5 per cent of GDP. In FY 2023, government Capex was at Rs 7.5 lakh crore. Studies have shown that one rupee spent by the government on public infrastructure ends up as Rs 2.5 in the economy, as it has the potential to augment job creation, prop up domestic consumption, and crowd-in private investments. ~ India is emerging as a credible investment destination, and FDI continues to be robust. The successful PLI scheme needs to widen its scope to include IT hardware, as also labour intensive sectors producing items of mass consumption such as toys, furniture, leather, cosmetics, etc, which in turn will increase cost competitiveness of domestic players, and will serve to create jobs. ~ Large increases in employment in manufacturing are critical for job creation for the under-skilled, under-educated youth who enter the workforce annually, and who want to transition from agriculture to better paying jobs in services and manufacturing. ~ Accelerating decarbonisation by unveiling a range of initiatives to support energy transition from fossil fuels to a green economy, which is needed to limit global warming. ~ Completing the asset monetisation and the disinvestment targets of the last year. ~ Enhanced outlays towards rural development and social sector schemes like MNREGA, PM Kisan, PM Awas Yojna, Gramin, and PM Gramin Sadak Yojna. ~ On the taxation front, the general rate for corporates at 25 per cent compares well globally, as also the 15 percent rate for new manufacturing companies which requires manufacturing to commence before March 2024. This incentive needs to be extended by five years up to 2029. ~ Introduction of an urban employment guarantee scheme, as India needs to create 90 million non-farm jobs between now and 2030 to absorb our demographic surplus. A National Urban Employment Guarantee Scheme could cover 20 million workers from the informal sector who can be channelised into urbanisation of cities. ~ A quantum jump in allocations on Human Development Indices like education and health. India’s healthcare spending needs to be raised from 1.28 percent of GDP to 2.5 to 3 per cent, while our education spend needs to increase from the current 3.5 per cent of GDP to 6 per cent as advised by the NEP. ~ Incentivise spending on high-risk R&D. ~ For India to emerge as a manufacturing hub and to promote exports, government needs to rationalise the tariff structure. Expectations are that the government will likely reduce import tariffs on a range of inputs and raw materials in order to reduce import dependence on manufactured products, as also maintain higher tariffs in some areas to protect domestic industry. ~ This would entail lowest or nil slab for inputs or for raw materials, and 2.5 to 5 per cent for intermediaries and final products, which will enable Indian industry to become cost-competitive and integrate with global value chains. Main risks to recovery Even though global inflation might have peaked, and central banks may have reached a tipping point in tightening of interest rates, globally we are at the onset of a recessionary cycle. How prolonged and deep the recession will be, is difficult to gauge. Empirically, there is a 70 per cent correlation between global events impacting the Indian growth rate. So, should there be a cascading effect due to a deeper recession than anticipated, it could dent GDP to contract to 5 per cent, which will then negatively impact revenue buoyancy and job creation. The author is ex-chairperson for the National Committee for Financial Inclusion and Literacy, Niti Aayog. Views expressed are personal. Read all the Latest News, Trending News, Cricket News, Bollywood News, India News and Entertainment News here. Follow us on Facebook, Twitter and Instagram.