The Union Budget for 2023-24 came in the wake of a mixed economic backdrop. On one hand, a spectre of worrying factors such as the slowdown in global growth, the fading impact of pent-up domestic demand, and ongoing monetary tightening were widely expected to moderate India’s growth momentum. On the other hand, after witnessing wild swings in GDP growth drivers on account of the Covid-19 pandemic, stability near trend levels were expected to be achieved in Financial Year 2024, which implies the return of normalcy in the business cycle, aided by a supportive policy backdrop. While the former necessitated the continuation of fiscal support for growth, the latter required broadening the post-pandemic exit for budgetary policy. While that’s complicated enough a job, the lure of unveiling a populist budget ahead of the 2024 Lok Sabha elections made the fiscal management task challenging.
Despite the challenges, Finance Minister Nirmala Sitharaman, in her presentation of the FY24 Union Budget, maintained policy continuity, prioritised macroeconomic stability, and unveiled futuristic ambitions.
Sound management, financial consolidation
From an economic point of view, this year’s Budget furthers the ethos of sound macroeconomic management.
For starters, the government has adhered to the path of financial consolidation by aiming for moderation in the fiscal deficit ratio—from 6.4 per cent of GDP in FY23 to 5.9 per cent in FY24. This bolsters fiscal credibility as the deft management of fiscal levers has mitigated slippage risks in the volatile post-pandemic phase. The government has also displayed fiscal restraint ahead of the election cycle in any form of unwarranted/unsustainable pump priming.
Next, the quality of expenditure continues to improve, too, with the capital expenditure/GDP ratio budgeted to jump 60 bps to a 20-year high of 3.3 per cent. At a granular level, 78 per cent of the budgeted central government capex in FY24 would be utilised by the ministries of road, railways, and defence – underlining policy emphasis on connectivity (under the aegis of PM Gati Shakti) and national security. On a trend basis, we note 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 for fiscal consolidation highlights boldness, clairvoyance, and patience in the government’s policy intent.
Second, the reliance on capex has served as an automatic stabiliser for the economy in the volatile post-pandemic phase.
Third, with the size of capital expenditure multipliers being 2.5 times and 5 times of revenue expenditure multipliers in the short term (up to one year) and long term (up to seven years), respectively, there are significant economic dividends to be reaped as the quality of growth improves in the long term:
First, transfers for capex by state governments are set to increase by 60 per cent in FY24 after a massive 269 per cent growth in FY23. In addition, the capex by public sector enterprises is set to increase by 22 per cent in FY24 after seeing three consecutive years of contraction.
Second, with the hope that the government walking the talk on capacity creation can crowd in private sector investments, the overall improvement in aggregate supply would also help anchor inflation close to the 4 per cent target.
Sound macroeconomic management does not preclude fiscal rectitude
For one, the provision of relief for income taxpayers (in the form of rejig of slabs, concessions, and lowering of peak rate) does not appear reckless. It has been done to incentivise a shift toward the new streamlined tax regime (introduced in 2020) that is light on exemptions and hence should aid overall compliance.
Two, the doubling of the deposit limit for senior citizens (to Rs 30 lakh) and the announcement of the Mahila Samman Saving Certificate should help increase the pool of savings, which could see additional fillip if taxpayers follow the policy nudge toward a new income tax regime.
Although not a part of the budget announcement, rebalancing the foodgrain 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 indeed created fiscal space. We note that the food subsidy bill is set to moderate to Rs 1.97 lakh crore in FY24 from Rs 2.87 lakh crore in FY23.
In addition to the astute fiscal management strategy, the Union Budget also highlights key futuristic growth drivers that will offer ease of doing business in India. Universalising PAN for digital systems of specified government agencies and proposing the creation of an ‘Entity Digilocker’—a simplified process for updating identities and addresses in government databases—for MSMEs would significantly aid the ease of operations.
In addition, the leverage of 5G infrastructure incentives for AI usage will have important ramifications for agriculture, healthcare, and intelligent transport systems. The proposal for incentivising 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 least, the development of 50 tourist destinations is crucial in recognising India’s tourism potential with implications for job creation and attracting foreign money.
Overall, the Union Budget remarkably balances policy priorities of growth versus fiscal consolidation, saving versus consumption, and job creation versus technological advancement. While that’s highly commendable, given the uncertain economic backdrop, the path ahead would not be easy.
Cushion from a high nominal GDP base would not be around in FY24, which means budgeted expenditure would be vulnerable to pruning in case of any shortfall in revenue realisation. Further, a ballooning interest burden (at 3.6 per cent of GDP in FY24) will absorb 41 per cent of revenue receipts on account of elevated post-pandemic borrowings by the government. The goal of compressing the fiscal deficit to under 4.5 per cent of GDP by FY26 would be challenging. This would require doubling policy efforts to shed fiscal flab, aggressive implementation of monetisation strategy, and enhancing tax coverage and compliance.
Vivek Kumar works at QuantEco Research and focuses on macroeconomics research. Dr Shubhada M. Rao is the Founder of QuantEco and former Senior Group President & Chief Economist at YES Bank. Views are personal.
(Edited by Zoya Bhatti)