WHEN the world’s fifth largest economy, India, presented its annual budget on the 1st day of February 2023, everyone was watching. From global investors seeking risk and return trade-offs to housewives recalibrating their grocery bills, all the stakeholders were taking note. The much-awaited fiscal policy, however, preferred to maintain a very cautioned stance. Loaded with rhetoric, as has been the hallmark of the ruling NDA Govt, the finance minister started the ceremonious budget speech with her vision for the “Amrit Kal” — a slogan coined by the BJP aimed at capturing electoral imagination for the next 25 years in terms of growth and progress. Like the previous few budgets which came with themes like “Sabka sath sabka Vikas” and “Atmanirbhar Bharat”, this one talks about “Saptarishi” — seven priorities aimed at areas like inclusive development, reaching the last mile, youth power, financial sector, green growth, unleashing the potential and infrastructure and investment. The halfhearted achievements in the last two themes were conveniently attributed to systemic factors like the pandemic, global geo-political risks, and inflationary pressures in the global energy markets. The Government, therefore, hopes that the vision of Amrit Kal sees a better beginning with Saptarishi before the fight for Lok Sabha elections gets real in 2024.
The Context
The challenging backdrop in which this budget was presented demanded extreme caution. The negatively changing macroeconomic, geo-political and socio-economic factors, in and around India, have created a perfect cocktail of risks that has the potential to materialize into a major destabilizing force.
Firstly, there were electoral compulsions with as many as nine state elections lined up in 2023 and the very important general election in 2024. Therefore, the urge to shower freebies with a populistic approach was there. Upcoming elections also kept the scope for reforms and divestments out of question.
Secondly, the global slowdown on account of the unfolding recession in Europe, the US, and Japan was directly impacting exports. With uncertain private investment, plateauing exports and struggling consumption, the Government expenditure seemed to be the only engine left for doing the heavy lifting.
However, third and most importantly, the pile of debt which steepened during the previous two financial years, due to the pandemic, offered a claustrophobic fiscal space for raising more debt. Additionally, the continuously sticky inflation, which the central bank had been wrestling with through monetary policy maneuvering, demanded controlled government expenditure to remain within the tolerable zone. Moreover, the high-interest rate situation which has escalated the costs for private investments, required a tight borrowing program by the Govt, therefore leaving enough space for private players to borrow comfortably. Lastly, the unfolding hostile realities along India-China’s Line of Actual Control (LAC) were creating expensive demands for cranking up defense expenditure.
Growth vs Redistribution
The two main functions that the Government, as the custodian of the nation’s collective wealth, is expected to perform, are growth and redistribution. The Government announced that it is confident in achieving a 7% growth in real GDP for FY 2022-23 and is expecting that the economic output will grow within a range of 6.0 to 6.8% for the upcoming FY. When it comes to growth, the larger picture of the budget depicts a push toward infrastructural development. With a year-on-year escalation of 33.4%, an outlay of Rs. 10.00 Lakh crore towards infrastructure and investment is aimed at railways, airports, ports, urban infrastructure, etc. It is assumed that with a comparatively higher multiplier effect, this investment will spur demand for men, materials, and machines across sectors. The expenditure of Rs. 5.94 Lakh crore on defense witnessed around 13% growth. This is the highest allocation among all sectors. This sizable enhancement has been allocated for advanced weaponry, modernization of armed forces, make-in-India military programs, and R&D.
For MSMEs, agriculture, and rural economy, the finance minister preferred to continue with the status quo, except for some minor tweaks.
The greatest casualty, however, has been the Mahatma Gandhi National Rural Employment Guarantee Act (MGNAREGA) which has otherwise been a very effective employment generation scheme for the rural economy. It witnessed a drastic drop of 33% from Rs. 89,000 Crore (revised estimates 2022-23) to only Rs. 60,000 Crore for 2023-24. In wake of consistently high unemployment, the curtailed expenditure towards this scheme can have a direct bearing on the rural demand. That’s the last thing that the consumption-dependent Indian economy expected right now.
In terms of redistribution which is mostly achieved through taxing the rich and passing the benefits to the poor through social sector spending, this budget seems to lack clarity. The recent Oxfam report on income inequality in India painted a very grim picture, with the top 1% owning 40% of total wealth and the 50% poorest paying 64% of the indirect taxes. Despite this, the Govt. went on reducing the effective tax rate on annual incomes of Rs. 2-5 Crore from an existing 42.74% to only 39%. A reduction of surcharge on similar lines has been announced for incomes above Rs. 5.00 Crore. The loss to the exchequer amounts to Rs. 35,000 crores.
Middle Class: The Fine Print
Another optically loaded announcement has been the changes in the personal income tax slabs under the new regime. Given the lukewarm response towards the new tax regime, which was introduced in 2020, this time the Government has tried to lure the taxpayers with more enhanced tax slabs. Pertinently, there has been no change in the old personal tax regime which enables a taxpayer to avail tax benefits through deductions like HRA, Home Loan interests, Provident fund, NPS, Health Insurance, etc. Over a period, the majority of personal taxpayers have made peace with the old tax regime by planning their long-term investments in instruments that help in tax deduction. Switchover to the new regime, despite better tax slabs, seems like a bad bargain for taxpayers as of now. The transition might take its own sweet time. Nevertheless, the change in the minimum tax slab from Rs. 5.0 Lakh to Rs. 7.0 Lakh has been a long-awaited change. It is expected to provide much-needed comfort to low-income groups. Furthermore, no tinkering with the capital gains tax was well received by the markets.
The bigger picture of fiscal math seems well-knit. The path toward fiscal consolidation, particularly the target of a 5.9 percent fiscal deficit, looks very prudent and achievable. Overall, the finance minister has been careful not to disturb the status quo much. Indirect taxes too, have been barely touched. Infrastructural push and defense expenditures are the major highlights with small and ambitious announcements like green projects, 5G labs, digital libraries, AI, Drones, coding, robotics, start-up incentives, skill development, etc adding as fillers to make the package look wholesome. However, the challenges of rampant unemployment, stagnating private investment, inflation, and rising inequality continue to pose serious threats. One can only hope that this seven-dimensional budget metamorphosizes the slogan of Amrit Kal into a tangible reality.
Views expressed in the article are the author’s own and do not necessarily represent the editorial stance of Kashmir Observer
- The author is an Economist and Economic Researcher at the National Institute of Technology Srinagar
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