Union Budget 2023 To Prioritise Productive Spending
The expectations surrounding a Union Budget are always high. This year is no different, amid uneven domestic growth and lingering global uncertainty triggered by geopolitics, slowing economic activity and a comeback of Covid-19 in some areas. In addition, the Parliamentary elections are around the corner, making the Union Budget FY24, the last full Budget prior to elections.
As always, the Union Budget will have the unenviable task of striking a fine balance between augmenting domestic growth impulses while containing the fiscal deficit. For the coming fiscal, an opportune decline in subsidies is likely to permit the Government of India to enhance capital expenditure and retain its focus on the rural economy. Overall, the focus must be on prioritising productive spending to make our domestic growth recovery more resilient.
Towards this end, the GoI is likely to continue to stress on the Gati Shakti and National Infrastructure Pipeline targets. A major focus is expected on key infrastructure segments like roads, railways and urban infrastructure.
Dedicated allocations for specified large infrastructure projects such as High-Speed Rail, Jal Jeevan Mission, Bharatmala, Sagarmala, Smart Cities, and Inland Waterways development could help expedite these programmes. Further, incremental allocations towards NaBFID and the NIIF would help them to ramp up their lending/investment to such programmes. Incentivising debt raising by select infra-PSUs, similar to infrastructure bonds/tax-free bonds, may also support funding availability for the sector.
FY24 is a crucial year given the government’s plans to complete the ambitious Bharatmala and allied programmes before the next elections. We expect the capital outlay on roads to increase to more than Rs 2 trillion to make up for the shortfall in private investments and slow progress in asset monetisation.
With the growing share of renewables in the energy generation mix, policy measures to incentivise the manufacturing of grid-scale battery storage facilities and electrolysers for producing green hydrogen are expected, given the policy push on the same.
Besides, measures to ensure long-tenure financing avenues for renewable energy as well as grid strengthening transmission (inter-state and intra-state) projects would be critical to achieve the renewable purchase obligation target of 43% by FY30.
The Budget must also consider fiscal incentives for driving domestic innovation and indigenous manufacturing and promoting the development of an ecosystem around new technologies like artificial intelligence, machine learning, etc. A strong ecosystem of 5G equipment, as part of the PLI scheme, in addition to increasing fibre penetration through the BharatNet project, bodes well for the 5G rollout.
Steps to boost infrastructure in the rural and remote areas are expected, such as stimulus for increasing broadband penetration. Further, we expect the Budget to continue to support the rural economy through the existing programmes such as the MGNREGA, PM Kisan, etc.
The pandemic necessitated the provision of free foodgrain, which enlarged the food subsidy bill. The GoI’s recent decision to subsume free foodgrain into the existing quantity provided under the National Food Security Act, has provided clarity for the entitlement over the next year as well as its fiscal cost.
Similarly, the fertiliser subsidy bill has spiked in FY23, driven by elevated prices of international raw materials and finished fertilisers amid high gas prices. We expect the amount for FY24 to remain elevated—upwards of Rs 2 trillion—although the GoI may not allocate the full amount at the outset in the Budget. The GoI could lower import duties on raw materials like phosphoric acid, ammonia and LNG to improve the competitiveness of domestic fertiliser manufacturers. The Budget must lay out a roadmap to increase the balanced use of fertilisers in the country along with a focus on environmental-friendly nano-fertilisers.
In terms of expectations for the financial services sector, we do not envisage any budgetary allocation for recapitalising public sector banks, given their healthy capital and solvency position. However, some of the PSU general insurance entities would need further support from the GoI via fresh capital infusion.
Given the continued focus on housing for all, targeted incentive schemes such as higher deduction for housing loans could bolster credit demand, amid rising interest rates and increase in property prices. Additionally, higher deductions under income tax for long-term saving instruments like NPS/80C/tax saving bonds/infrastructure bonds, etc., would play an important role in raising resources for the infrastructure sector. Similar concessions could also be considered for promotion of those debt funds, which have the mandate to invest in debt instruments issued by ESG-compliant companies.
The Union Budget 2023-24 may also include the announcement of a feel-good social sector scheme, which would arguably help to assuage the uneven sentiment in the economy. However, a scheme like this should be carefully targeted to help those sections/sectors that are yet to recover fully from the scars of the pandemic. And its cost should be moderate, to ensure that the GoI doesn’t slip from the fiscal consolidation track.
Ramnath Krishnan is the managing director and group chief executive officer at ICRA Ltd.
The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.