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Budget 2023: Through An Economist's Lens

Budget 2023 will be know for two types of growth push -- capex and consumption

<div class="paragraphs"><p>Image Source: Freepik&nbsp;</p></div>
Image Source: Freepik 

In its favour, Budget 2023–24 perhaps stands out as one that checks many "right" boxes on the ubiquitous wish list of every budget. 

A difficult feat, more so since the budget was delivered amidst expectations of an impending domestic growth slowdown in fiscal 2024 owing to slowing global growth impulses, fading domestic pent-up demand, and ongoing monetary tightening by the Reserve Bank of India.

Instead of dwelling on the hits and misses of Budget 2023, we try to assess the budget from five perspectives.

Does The Budget Support Growth?

From the perspective of growth, the Union Budget 2023 will be known for two types of growth push—capex and consumption.

  • The former is a conventional Keynesian fiscal tool to support infrastructure-led economic growth with favourable externalities for private investments. The government intends to deliver on its capex promise via a significant augmentation of budgeted capital expenditure to a two-decade high of 3.3% of GDP in FY24. Sequentially, the increment would amount to 0.6% of GDP compared to FY23 levels. This is expected to be led by a broad-based ramp up in spending allocation to roads, railways, telecom, and housing. Railways' outlay of Rs 2.4 trillion is the highest ever allocated to the sector, clocking a growth of 51% over FY23. This puts the quality of spending (i.e., the ratio of capital to revenue expenditure) at a two-decade high of 28.6% and a sequential improvement of 7.5%, i.e., the highest since FY08.

  • The nudge to move to a new tax regime (introduced in 2020) for individuals with an increase in the basic exemption limit and reduced tax slabs is likely to offer sizeable tax relief. For individuals earning less than Rs 15 lakh annually, a shift to a new tax regime can lower their tax obligations by 20–25%. Given that this section of the population has a higher propensity to consume, higher disposable incomes can allow a consumption uptick in affordable segments of personal care products, home improvement goods, consumer durables, especially automobiles and electronics, and housing. The substantial overshoot in FY23 spending under PM Awas Yojana by 61% versus budgeted estimate levels and the continued focus on the scheme in FY24 may very well be able to tilt the bias of incremental consumption towards higher durability.

  • More so, the estimated revenue foregone via the tax relief measures at less than 0.1% of GDP is miniscule in comparison to the ‘feel-good’ that the long impending changes on the personal income tax front induce. Markedly so, this should serve well in a pre-election year. 

Is The Budget inflationary?

Budget 2023 has been cautious to limit the increase under rigid heads of revenue expenditure. Ex-subsidies, which are likely to see a significant decline, FY24 revenue expenditure is budgeted to moderate to 10.3% of GDP from 10.6% in FY23. This, juxtaposed with a strong double-digit growth in capex for the fourth consecutive year, underscores a stronger enhancement to supply-side augmentation than demand-side support. Pointedly so, the nudge towards a streamlined new tax regime that is light on exemptions is also unlikely to fuel inflationary pressures.

The FY24 budget must also be seen in conjunction with the government’s two recent decisions: to liquidate substantial stocks of wheat from FCI in the open market and to discontinue the PMGKAY from January, the free foodgrain program introduced in the Covid era, both of which, in all probability, will break the back of cereals inflation running at a decadal high of 13.8% YoY as of December 2022.

How Credible Is The Budget Maths?

The budget arithmetic, like in recent years, looks plausible and is not overly optimistic. The nominal GDP growth pegged at 10.5% for FY24, though marginally higher than our assessment of 10.0%, appears reasonable. Having said so, a marginal improvement in gross tax revenue buoyancy envisaged at 1.0 for FY24 compared to 0.8 in FY23 may face some hurdles. Some marginal downside in tax revenues cannot be ruled out, but if fortuitous enough, it can be offset by a continued softening in global commodity prices, especially fertiliser prices, if the Russia-Ukraine war were to dissipate.

The fiscal marksmanship of this budget is also to be seen and appreciated in the constant nudge to state governments to go into capex overdrive to complement the centre. Interest-free capex loans to states with an enhanced outlay of Rs 1.3 lakh crore in FY24 are proposed to be partly linked to reforms of urban planning, enhancing the credit worthiness of ULBs, and the state share of capital expenditures of central schemes.

Will financing Of Fiscal Deficit Be Easy?

The gross borrowing target of Rs 15.4 lakh crore is in line with QuantEco Research's estimate of Rs 15.35 lakh crore. While this is lower vis-a-vis consensus expectation of Rs 16 lakh crore and would be supportive of market sentiment, the overall quantum of gross borrowing estimated at 5.1% of GDP is about 1.5% higher than the pre-pandemic average and hence would continue to cast an overhang on supply pressure.

While the budget has announced a new small savings scheme, the Mahila Samman Savings Certificate, and enhanced limits on certain current schemes to attract flows into small savings, given the increase in bank deposit rates (and room for some further upside), the assumptions on collections under small savings could serve some negative surprises.

How Should RBI View This Budget?

From a monetary policy perspective, this budget scores on two counts. First, It deftly balances the objective of supporting growth without inducing inflation, and second, it delivers on the commitment of fiscal consolidation. The finance minister also reiterated the goal of lowering the fiscal deficit below 4.5% of GDP by FY26. For preserving macroeconomic stability, it is imperative that fiscal dominance of monetary policy sequentially eases. The budget, in its intended fiscal prudence, has also checked this box.

Yuvika Singhal is an economist with QuantEco Research with over 12 years of experience in India economic research. The views expressed here are those of the author and do not necessarily represent the views of BQ Prime or its editorial team.