Union Budget 2023-2024: Finance Minister Nirmala Sitharaman will present her fifth consecutive Union Budget on Wednesday, February 1.
The previous two budgets were in the shadow of the pandemic and the FM had to create fiscal space to support the country’s immediate needs
The Union budget is one of the most awaited documents presented by the government. As major policies and projects are announced throughout the year, the budget lays out both the current health of the economy and the direction in which the government intends to push the economy.
The previous two budgets were in the shadow of the pandemic and the FM had to create budgetary space to support the immediate needs of the country. However, with inflation and the post-pandemic recovery boosting tax revenues, the central gross fiscal deficit is expected to be contained to the 6.4% target for this fiscal year. In previous budgets, the FM had opted for a longer fiscal consolidation path, with the gross budget deficit expected to narrow to just 3.5% by 2025. The FM is expected to continue on this path.
The buoyancy in tax revenues is not expected to continue, especially if inflation eases and there is a decline in domestic demand over the next fiscal year. But revenue concerns cannot be offset by a significant cut in public spending. Growth may have returned to the Indian economy, but the pandemic years have resulted in a decline in absolute GDP or income of the economy. Moreover, with each revision of GDP data for Covid years, real GDP moves away from the trend of non-COVID GDP, indicating the extent of damage from the pandemic that may take longer to reverse. In the multiple issues and challenges surrounding the country, it is always important to remember that some of the gains made in poverty reduction have been lost due to the pandemic. Therefore, the focus on growth while controlling inflation will continue to weigh on policymakers.
As discussed in previous years, what will matter is not the budget deficit per se, but the quality of public spending. A key element in successfully stimulating revenue generation in the economy will be the speed and timing of government capital spending. The government, in anticipation of a global slowdown that could lead to a deceleration in exports, can incentivize the private sector by advancing the timetable for the implementation of certain major infrastructure projects. While progress on several infrastructure projects has been good so far, highway networks have yet to pick up speed and progress on power and energy has been modest. The focus should be on improving financial inclusion and tech connectivity beyond Tier 1 cities.
Private sector investments are largely expected to wait for global uncertainties, with the exception of some investments in specific sectors. According to Deloitte’s forecast, the expected GDP growth rate for fiscal year 2022-23 is between 6.5% and 6.9%. NSO expects, according to its latest forward estimates, the GDP growth rate to be slightly above 7%. However, inflation is expected to remain at or above RBI comfort levels this year and even next, before declining in the second half of 2024. Downside risks to the currency and current account balance have also increased.
The government has limited sources of revenue. In the current environment, raising tax rates or introducing new taxes can have a chilling effect on private consumption. Besides taxes, the other major source that has been generally discussed is asset monetization and divestment. The government is in danger of missing the asset monetization target for the current fiscal year. In order to increase revenue from this stream, the Indian government may need to consider policies that can involve private actors, especially in certain sectors.
The most telling impact of the decline in GDP has been job creation. While the PLI program promotes “Make in India”, the job multiplier still lies in services and SMEs. A key expectation of the GF this time will be to use the budget to refocus on some crucial structural reforms to encourage investment in the services sector. The service sector has enormous potential, whether in retail, trade, tourism or IT. Moreover, India is competitive in the services sector and has a comparative advantage. An effort to assess the contribution of Global In-house Centers (GICs) and optimize the regulatory ecosystem for these GICs could revive the service sector and create opportunities for our workforce. It can be noted that despite India’s talent advantage, many global players are diversifying their services investments into other low-cost economies.
Reforms should be prioritized as a centerpiece of the strategy, to also support the SME segment, in particular to reduce the complexity and costs stemming from the plethora of regulatory compliances.
In summary, the FM is expected to take the opportunity of the upcoming budget to build on the reform agenda to ignite the engine of micro-entrepreneurship and job growth.
(Richa Gupta is a Partner at Deloitte India and Rumki Majumdar is an Economist at Deloitte India. Opinions expressed are personal)
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