Budget can be viewed from two perspectives – one, the narrow accounting view, and two, the broad economic perspective. From an accounting standpoint, the budget is the financial statement of proposed expenditures and expected revenue for a year. From the economic viewpoint, it is an instrument of fiscal policy that can produce desirable economic consequences.
The difficult period is behind us
The last three years were challenging for the Indian economy. The COVID-19 pandemic, the Russian invasion of Ukraine and the American central bank’s tight monetary policy impacted the global economy and India, too, was impacted. Covid dealt a heavy blow to India’s large informal economy resulting in massive job and income losses. Increased government spending on fiscal stimulus, food security and fertiliser subsidy widened the fiscal deficit. The Ukraine war pushed commodity prices up. Rising interest rates in the US led to capital outflows from India and the rupee depreciated by 11 per cent in 2022. India weathered these storms and fortunately, these challenges are now almost behind us.
Ready for global challenges
As Finance Minister Nirmala Sitharaman prepares to present the Union budget 2023, the economic situation is much better now. India is currently the fastest-growing large economy in the world. Gross Domestic Product (GDP) growth in FY23 is expected to be 7 per cent. For the next financial year also, India would be the fastest-growing large economy with a growth rate of above 6 per cent. High GDP growth has led to better-than-expected tax collections. The banking sector is healthy with low non-performing assets (NPAs). Credit growth at 17 per cent is impressive. While our neighbours Sri Lanka, Pakistan and Bangladesh have approached the IMF for assistance, India is in a strong position with adequate foreign exchange reserves of $550 billion. The IMF chief has described India as ‘a bright spot in the dark economic horizon.’
Global economy is slowing down
India’s economic resilience is a silver lining. But the finance minister cannot ignore some dark clouds looming on the global economic horizon. The global economy will slow down sharply in 2023. The three major engines of global growth – the US, China and the Euro Zone – are in a sharp slowdown. This will impact global trade and India’s exports, too, will be impacted. Consequently, India’s growth will be lower in FY2024 and the finance minister cannot expect the tax buoyancy of this year to continue next year. At the same time, Nirmala Sitharaman has to reduce the fiscal deficit as promised last year. Also, the FM has to continue the capital expenditure programs to sustain growth in the economy. Since 2024 is the General Election year, budget 2023 will be the last full budget of the government. Also, nine States are going to the polls this year. Therefore, some popular announcements like income-tax relief for the middle class also can be expected in the budget.
Fiscal consolidation should be the top priority
India’s fiscal deficit and current account deficit are under control but continue to be high. Financial stability will be impacted unless these are brought down. The fiscal deficit target of 6.4 per cent of GDP , set in the previous budget, will be easily achieved since the tax collections have been buoyant and the nominal GDP growth will be 15.1 per cent this financial year. This favourable scenario is unlikely to repeat in the coming year. Even in this challenging situation, the FM should stick to a fiscal deficit target of 5.8 percent for FY2024. Financial stability needs fiscal discipline.
Thrust on infrastructure should continue
India has made rapid strides in infrastructure development in recent years. Projects like ‘Bharatmala’, ‘Sagarmala’ and ‘PM Gati Sakti’ are transforming the economy’s infrastructure. India’s highway network has doubled in the last 10 years; airline traffic has tripled and broadband connectivity has multiplied 40 times. The JAM ( Jandhan, Aadhar, Mobile) trinity has created an automated social security network. The thrust of the government on infrastructure will continue in the coming budget, too.
I-T relief and reforms in capital gains tax
The basic exemption for income tax at Rs 2.5 lakh was fixed in 2014. Upward revision in the exemption limit is necessary and can be expected in the budget. The FM is likely to announce relief in the ‘new income tax regime without exemptions’. An area that needs reforms is the capital gains tax. Now we have different tax rates and holding periods for equity, debt and real estate which has to be simplified.
Politics should not trump economics
As the German statesman Otto von Bismarck famously said, “politics is the art of the possible.” Since budget 2023 would be the last full budget of this government before the general elections of 2024, the finance minister may be tempted to ‘play to the gallery’. The FM should avoid negative populism which can damage the economy.
Send a message of sound economics
Budget 2023 is also important from another angle. This would be the first Budget after India has assumed the G20 presidency. G20 strives for stable economic growth and global prosperity. Therefore, the FM can be expected to deliver a message of good economics avoiding negative populism. In the long run, good economics will turn out to be good politics, too.
(The writer is the chief investment strategist at Geojit Financial Services)
