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Amid headwinds, Budget may aim at fiscal consolidation

BusinessAmid headwinds, Budget may aim at fiscal consolidation

‘Union Budget 2023-24 offers an opportunity to bring in a targeted scheme for expanding credit to micro businesses’.

Going by Nirmala Sitharaman’s broad indication at an industry event in December that the “upcoming Union Budget will follow the spirits of the earlier budgets and further the template for India’s next 25 years”, the Finance Minister would have scripted the country’s expectations for the last full Budget before the general elections next year. The design of things to come on 1 February 2023 has, by now, been layered in line with Sitharaman’s hint at the need to strengthen Indian manufacturing sector, for industry to focus on newer areas of services sector and use the recession in the West as an opportunity to attract companies to India. Of course, all this has to factor in the reality that the Union Budget 2023-24 is being presented at a crucial juncture of geo-political uncertainties, high inflation and slowing world economic growth. Even then, the World Bank predicts strong GDP growth in FY23 for India, revised upwards from 6.5 per cent to 6.9%, while for FY24, it is pegged at 6.6 per cent. Retail inflation in the country fell below the RBI’s upper tolerance level of 6.0% for the first time since December 2021 and exports have been growing to some extent despite a global slowdown.
In this context, 2023 could well be a Budget playing to popular tunes. However, according to Nomura analysts Sonal Varma and Aurodeep Nandi, while some higher rural spending and income tax tweaks are possible, there is little possibility of a populist Budget. The other view, from Anmol Das, Head of Research, Teji Mandi indicates ‘a populist and expansionary Budget’ with major impetus on infrastructure, manufacturing, defense and export driven businesses. “That apart, other focus areas will be disinvestment targets not met over last several years, highly demanded in investment circles,” says Das. Subhrakant Panda, President FICCI mirrors the industry expectation of a growth-oriented Budget 2023 which will build further on the foundation of government’s initiatives over the last eight years.
The jury is still out on the direction as the Budget comes at a crucial juncture when India would need to adjust the continuity on the path of fiscal consolidation. As a positive backdrop, advance estimates peg nominal GDP growth at 15.4% y-o-y in FY23, higher than the budgeted 11.1%. Tax revenues have been buoyant, with April-November FY2023 showing gross collections rising by 15.5% y-o-y, driven by direct taxes including both corporate and income taxes. On the flip side are costs imposed by the Russia-Ukraine war including higher fertiliser subsidy and continuation of pandemic-era free food programme until December 2022. This alongwith a strong focus on capex has led to robust expenditure growth. Against a disinvestment target of Rs 650 billion, only Rs 306 billion has been achieved so far.
“Despite an expected lowering of growth in GoI’s tax revenues in FY24, there is a need to undertake fiscal consolidation. To ensure sustained economic growth, Budget 2023 should focus on high capex spending as it generates high multiplier effects,” opines D.K. Srivastava, Chief Policy Advisor, Ernst & Young India. Nomura’s report also expects the government to aim at balancing consolidation and the need to prop up growth and announce a fiscal deficit target of 5.9 per cent of GDP in FY24. “This should be supported by lower subsidy spending, while ramping up capex, meaning a good quality of consolidation,” say Varma and Nandi. Srivastava points to the prospect of moderation of global crude prices accompanied by a fall in inflation which may open up possibility of reducing some of the relatively large petroleum price linked subsidies.
It would be safe to bet big on the Budget’s focus towards making the manufacturing sector growth stronger, a priority that cuts across populism and prudency. Manufacturing activity contracted significantly with industrial output falling 4 per cent in October 2022—its weakest performance in 26 months after revised growth of 3.5 per cent in September—hit by rising interest rates, slowing global growth and damp consumer demand. This is despite policy measures over the years to support specific local industries, foster domestic champions across sectors and incentivise select entities. “A whole of Government approach needs to be adopted through a Competitiveness Act which can bind all agencies to work in coherence, towards promoting nation’s growth,” suggests Pradeep S Mehta, Secretary General, CUTS International, a global public policy research group who articulated this concern at a stakeholders’ meet with Sitharaman. Mehta also calls for Budget to address the need for a National Competition Policy to help remove distortions and promote pro-competition approach in policy making. “A draft is pending with the Government for more than 10 years now,” Mehta adds.
The need for a manufacturing stimulus for Micro, Small & Medium Enterprises (MSMEs) may resonate in the Budgetary provisions this year to scale up capacity in a sector which contributes around 30% in GDP, more than 49% in exports and 11 crore in employment. Rajesh Sharma, Managing Director, Capri Global Capital points out the latest data on Udyam Portal showing a significant proportion of registered businesses are micro businesses. “Union Budget 2023-24 offers an opportunity to bring in a targeted scheme for expanding credit to micro businesses,” says Sharma. This could be through revival of the Credit Linked Capital Subsidy Scheme for technology up-gradation for MSMEs and providing green finance for funding climate-friendly technology in MSMEs, as sought by CII.
Revitalizing investment is also key for manufacturing growth and private sector investment needs a boost since public investment alone is not enough to energize growth in the economy. To revive investment, the Budget needs to look at raising capital spending to 3.3-3.4% of GDP in FY24 from the 2.9 per cent currently and calibrate it to 3.8-3.9 per cent by FY25, suggests CII, with renewables alongwith roads and ports presenting potential areas for increasing outlays. Private investments can also be enhanced by lowering the cost of doing business. There is a strong likelihood of the Budget fulfilling industry need for simplification of the capital gains tax structure and removal of ambiguities in the interpretation of tax, thereby making compliance easier.
The increase in public investments in agricultural infrastructure in the Budget are much needed to attract private investments in cold storage, warehousing and supply chain of agriculture produce in order to reduce food wastages. Measures to boost exports of agri and food processing products to the target of USD 100 billion in the next three years from the current level of around USD 50 billion (2021-22), improved access to credit for long term loans, adoption of direct transfer of subsidies on electricity, fertilisers, etc. to the beneficiaries to ensure better delivery of subsidies to the end-users are being seen as key deliverables.
However, both manufacturing and investments can only be justified if there is consumption demand to infuse vibrancy in the domestic economy. The Government is banking on an additional 140 million middle income households and 14 million high net worth individual households which will be part of India’s economy by 2030 and expand the base for the domestic industry to generate demand. There is need to go beyond that. “Government should contemplate a reduction in the rates of personal income tax in its next push for reform as this would increase disposable incomes and revive the demand cycle,” says Sanjiv Bajaj, President, CII which sees a possibility of the Budget rationalizing income tax slabs and rates for individuals, reducing 28% GST rate on select consumer durables and expediting rural infrastructure projects for facilitating employment generation in the hinterland.

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