Flashback to the 2018-19 Union budget. Keeping the 2019 Lok Sabha polls in mind, the then finance minister, the late Arun Jaitley, presented what most economists and policy experts dubbed a rural budget. Jaitley’s emphasis was clear — how to expand the ruling Bharatiya Janata Party’s footprint in rural areas by earmarking hefty allocations for agriculture and rural infrastructure. Earlier, in 2013, the then FM P Chidambaram presented the last full budget of the United Progressive Alliance government ahead of the 2014 general elections. He extended relief to taxpayers below the Rs 5,00,000 bracket and imposed a surcharge of 10% on individuals whose taxable income exceeded Rs 1 crore annually — both constituted political messaging.
For the current BJP regime, the challenges ahead of the budget are twopronged. One, the FM is expected to send a feel-good political message before this year’s critical assembly elections in several large states such as Karnataka, Madhya Pradesh, Chhattisgarh, Rajasthan and Telangana in addition to the Lok Sabha polls in April-May 2024. Next year, there will only be a vote on account till the new government presents a full budget.
Two, the private sector has yet to loosen its purse strings, which means the FM will have no option but to sharply raise the government’s spend on infra for the third year in a row to keep India’s growth momentum intact amid global headwinds.
ET spoke to a dozen government officers, economists and policy experts to piece together this story. It seems Sitharaman’s forthcoming budget may stand on the twin pillars of robust capital expenditure and pre-election populism. Both would be her compulsions, not choices.
Ranen Banerjee, a partner in the economic advisory services of PricewaterhouseCoopers, says FM’s priority should be “increasing capex allocation by 30% over FY23 and providing a consumption boost by way of more money in the hands of the lower income end of the taxpayer base through a one-time additional standard deduction”.
In last year’s budget, Sitharaman stepped up the outlay of capital expenditure to Rs 7.5 lakh crore, an increase of 35% over Rs 5.54 lakh crore budgeted a year earlier. Another 30% raise in this budget, as suggested by Banerjee, will mean earmarking Rs 9.75 lakh crore for infra spend in the coming year.
A senior railway officer who spoke to ET on condition of anonymity talks about the possibility of “a massive increase in capex for the railways”, a part of which will be used for “manufacturing upgraded versions of Vande Bharat trains”. The railway budget has been a part of the Union budget since 2017. No doubt, Indian Railways along with other key core sector ministries such as the ministry of road transport and highways, the ministry of power and the ministry of ports, shipping and waterways will have to absorb additional allocations if government’s capex spend has to do the heavy lifting in pursuit of a robust growth in the coming year.
“The key expectation from the FM at this juncture is to maintain the growth rate of the economy while keeping fiscal deficit and inflation in check,” says Vikas Vasal, national managing partner (tax), Grant Thornton Bharat. He cautions that this is going to be challenging because of geopolitical developments, looming fear of a global recession and the return of Covid.
Sitharaman might have little elbow room to manoeuvre India’s growth trajectory except stepping up the public spend on infrastructure. After all, India Inc may still be on a wait-and-watch mode ahead of a global recession even though a large number of biggies are sitting on a healthy balance sheet. Last month, as reported by the news agency PTI, chief economic advisor V Anantha Nageswaran said at a CII event that the private sector needed to increase its capital expenditure as “it may not be healthy for the public sector to continue to invest at the same pace as it did in the last decade”, adding how the combined investment by the Centre, states and public sector enterprises went up 3.5 times over the last decade, from Rs 6.8 lakh crore to Rs 21.2 lakh crore. In her last budget speech, Sitharaman expected the government’s infra spend would help “crowd-in private investment”. The government has also been betting on the productionlinked incentive (PLI) scheme to persuade India Inc to invest. “PLI schemes in different sectors have received an encouraging response from investors and businesses,” says Vasal.
Would Budget 2023 expand PLI schemes to further crowd in private sector investments? “We expect the government to extend PLI schemes to new sectors such as electricity storage systems, aircraft including UAVs, AI, robotics and automation etc.,” says Arun Singh, global chief economist of Dun and Bradstreet. Currently, PLI scheme covers 14 sectors ranging from automobiles and electronics to drones.
While India Inc is demanding more and more incentives for recovery from the Covid period, most economists tend to caution the FM not to overspend. “The only caution that the FM may need to keep in consideration is to not go beyond the fiscal deficit targeted for the current fiscal of 6.4%. As long as the deficit is in the range of 5.5-6%, it will give an indication of fiscal prudence and willingness to tread the fiscal consolidation path,” says Banerjee. “It will also give comfort to rating agencies on the sovereign rating front.”
Against this backdrop, a robust tax collection this year has been good news for the government. After all, it has to brace itself for big spends on schemes that will woo voters in the upcoming election season. Direct tax collections up to January 10, for example, are Rs 14.7 lakh crore, a 24.5% growth y-o-y. The growth in personal income tax during the same period is even higher, at 30.5%, according to finance ministry data released earlier this week.
Sudhir Kapadia, partner in tax and regulatory services of EY India, argues that the government should bite the bullet and lower personal income tax rates. “The government can do away with some existing slabs and retain only select deductions linked to social securities, e.g., healthcare and pension. Lower tax will mean more disposable income, which will propel consumption and help in GDP growth,” says Kapadia. EY has sent an income tax rate change proposal to the finance ministry under which anyone with an annual taxable income of less than Rs 5 lakh will be out of the tax bracket (now it is Rs 2,50,000), with the highest slab of 30% applicable only to those with an income of Rs 20 lakh and above (now it is Rs 10 lakh). Among nontax proposals, EY has suggested an urban counterpart to the MGNREGA, the highly successful rural scheme introduced in 2005. Several economists are also advocating an increase in MGNREGA funds to boost private consumption in rural India.
All these pre-budget ideas — be it income tax rebate, higher allocation under MGNREGA or an identical scheme for the urban poor — will help bolster the ruling party’s base among voters. But each of these ideas will have a cost attached to it. The question is — will the government bite the bullet?
