TeaThe Union Budget for 2023-24 has come in the wake of a mixed economic background. On the one hand, India’s growth was widely expected to slow down due to worrying factors such as slowing global growth, fading effects of pent-up domestic demand and ongoing monetary tightening. On the other hand, after witnessing high volatility in GDP growth drivers due to the COVID-19 pandemic, they were expected to stabilize near trend levels in FY2024, implying a return to normalcy in the business cycle, aided by a Received supportive policy background. While the former required a continuation of fiscal support for growth, the latter required budgetary policy to broaden the post-pandemic exit. While this is a herculean task, the lure of presenting a populist budget ahead of the 2024 Lok Sabha elections has made the fiscal management task challenging.
Despite the challenges, Finance Minister Nirmala Sitharaman, in her presentation of the FY24 Union Budget, maintained policy continuity, prioritized macroeconomic stability, and unveiled future ambitions.
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Sound Management, Financial Consolidation
From an economic perspective, this year’s budget carries forward the ethos of sound macroeconomic management.
To begin with, the government has followed a path of fiscal consolidation with a target of moderation in the fiscal deficit ratio—from 6.4 per cent of GDP in FY2023 to 5.9 per cent in FY24. It enhances fiscal credibility as efficient management of fiscal leverage has reduced the slippage risk in the post-pandemic phase. The government has also displayed fiscal restraint in the form of any undue/volatile pump priming ahead of the election cycle.
Subsequently, the quality of expenditure also continues to improve, with the capital expenditure/GDP ratio projected to reach a 20-year high of 3.3 per cent in the budget by 60 bps. At a broad level, 78 per cent of the budgeted central government capex in FY24 will be used by the road, railways and defense ministries – a policy emphasizing connectivity (under the aegis of PM Gati Shakti) and national security. Going by the trend, we see that the CAPEX/GDP ratio has more than doubled in the last five years. There are several macro takeaways from this trend:
First, the continued expansion of public capex despite challenges to fiscal consolidation highlights the boldness, foresight and fortitude in the government’s policy intent.
Second, the reliance on capital expenditure has acted as an automatic stabilizer for the economy in the volatile phase post-pandemic.
Third, with the size of capital expenditure multiples being 2.5 times and 5 times revenue expenditure multiples in the short term (up to one year) and long term (up to seven years), respectively, there are significant economic dividends to be gained in the quality of growth over the long term. Improves:
Firstly, after a whopping 269 per cent increase in FY 2023, a 60 per cent increase in FY 2024 has been fixed for capex by state governments. Further, capex is set to increase by 22 per cent in FY24 after public sector enterprises witnessed three consecutive years of contraction.
Second, an overall recovery in aggregate supply, along with expectations that the government, which has been talking about capacity building, can crowd in private sector investment, will also help bring inflation closer to the 4 per cent target.
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Sound macroeconomic management does not prevent fiscal larceny
For one, the provision of relief for income tax payers (in the form of change in slabs, concessions and reduction in the highest rate) does not seem reckless. This has been done to encourage a shift towards the new streamlined tax regime (introduced in 2020) which is lighter on exemptions and hence should aid overall compliance.
Two, doubling the deposit limit for senior citizens (up to Rs 30 lakh) and announcement of Mahila Samman savings The certificate should help in increasing the pool of savings, which may give additional incentive to taxpayers to follow the policy towards a new income tax regime.
Though not part of the budget announcement, rebalancing the food grain distribution scheme (by discontinuing the Pradhan Mantri Garib Kalyan Anna Yojana and subsuming it under the National Food Security Act by making it free for one year) has actually created fiscal space . We note that the food subsidy bill has narrowed from Rs 2.87 lakh crore in FY23 to Rs 1.97 lakh crore in FY24.
Apart from the shrewd financial management strategy, the Union Budget also highlights key futuristic growth drivers that will enhance ease of doing business in India. Universalization of PAN for digital systems of specific government agencies and proposal for creation of an ‘Entity DigiLocker’—A simplified The process of updating identity and address in the government database- will go a long way in ease of operations for MSMEs.
In addition, the benefits of 5G infrastructure incentivizing the use of AI will have a significant impact on agriculture, health care, and intelligent transportation systems. The proposal to stimulate new age demand for lab-grown diamonds will not only reduce carbon footprint but can also potentially serve as a tool for job creation and reduce import dependency.
Last but not the least, the development of 50 tourist destinations is important in realizing India’s tourism potential with implications for job creation and attracting foreign funds.
Overall, the Union Budget remarkably balances the policy priorities of growth versus fiscal consolidation, savings versus consumption, and job creation versus technological progress. While this is highly commendable, the road ahead will not be easy given the uncertain economic backdrop.
There will be no cushion from the higher nominal GDP base in FY24, which means budgeted expenditure will be weaker in case of any shortfall in revenue collection. In addition, a ballooning interest burden (at 3.6 per cent of GDP in FY24) will absorb 41 per cent of revenue receipts due to post-pandemic borrowing by the government. The target of reducing the fiscal deficit to less than 4.5 per cent of GDP by FY26 will be challenging. This will require redoubled policy efforts towards fiscal easing, aggressive implementation of monetization strategy and increasing tax coverage and compliance.
Vivek Kumar works at Quantico Research and focuses on macroeconomics research. Dr. Shubhada M. Rao is the founder of Quantico and former Senior Group President and Chief Economist of Yes Bank. Thoughts are personal.
(Edited by Zoya Bhatti)