Budget 2023-24: Signalling Growth With Macroeconomic Stability

M. Govinda Rao

In the prevailing domestic and international economic environment, formulating the budget was riddled with several complexities. After the shocks created by the pandemic in two successive years, the economic disruptions caused by the Russian invasion of Ukraine and the sanctions following it, the Indian economy has had to meet the challenge of unsustainable levels of deficit and debt and declining trends in investments. 

In fact, the investment-GDP ratio of the country has shown a steady decline from 39 per cent in 2011-12 to 32 per cent in 2019-20. Although the economy has shown a remarkable recovery from the series of shocks and is one of the fastest-growing large economies after the pandemic and crossed the level of incomes that existed in 2019-20, it is still 7 per cent below the pre-pandemic growth trajectory.  

Global Growth Seen Slowing

Internationally, the excess liquidity during the pandemic and the Russia – Ukraine war has led to sharp increases in prices and interest rates in the advanced economies, and continued restrictions in China have caused serious supply disruptions. The IMF has estimated the global growth for 2013 at 2.9 per cent and at least a third of the global economy is facing recession. The pressure of imported inflation combined with the withdrawals from foreign institutional investors have put greater pressure on exchange rates and prices. 

Not surprisingly, the only engine of growth working in India is private consumption and given the bleak export prospects in a slowing world economy, the prospects of growth acceleration depend on rejuvenating investments. In this environment, the Budget had the unenviable task of providing impetus to investment by significantly increasing public investment while containing the fiscal deficit on the path of calibrating sustainable fiscal policy.

Under these circumstances, the Finance Minister must be credited with undertaking a fine balancing act in the Budget. Considering the sharp increase in the subsidy bill last year on account of both food and fertilisers and increased MGNREGA bill, the fiscal deficit was contained at the budgeted level of 6.4 per cent of GDP. The increase in the subsidy bill on food and fertilisers totalled almost Rs 2 lakh crore over the budgeted figures. The fiscal deficit was contained at 6.4 per cent mainly due to higher tax collections to the tune of almost Rs 1.6 lakh crore. 

Another factor that helped to contain the deficit at 6.4 per cent of GDP was the higher nominal GDP estimate in the first advance estimate as compared to the assumption made in the Budget. While the 2022-23 Budget assumed the nominal GDP at Rs 258 lakh crore, the first advance estimate places it at Rs 273 lakh crore.   

Budget’s Big Capex Push

The salient feature of the 2023-24 Budget is its thrust on capital expenditures while traversing the path of fiscal consolidation. The capital expenditure has been budgeted to increase by 37.4 per cent to 3.7 per cent of GDP and this comes on the back of 25 per cent increase last year.  In fact, in the last four years, the ratio of capital expenditure to GDP has shown a steady rise from 1.7 per cent to 3.7 per cent. 

Given that public investment stimulates private investment by 1.2 times, the increase in capital expenditures provides a clear signal for the private sector to increase investments. Barring unforeseen circumstances, this should help in rejuvenating the public and private investment engines to accelerate growth, though exports will continue to be subdued during this year due to a global slowdown.

The increase in infrastructure spending is budgeted even as the fiscal deficit to GDP ratio has been compressed by 0.5 per cent of GDP. In the 2020-21 Budget, the Finance Minister had promised to free the borrowing space to private businesses by containing the fiscal deficit at 4.5 per cent of GDP and this year, it is budgeted to be reduced from 6.4 per cent of GDP to 5.9 per cent. This has been done mainly by reducing the food and fertiliser subsidy bill. The fertiliser subsidy is budgeted to be lower by Rs 50,000 crore mainly due to lower prices of fertilisers. 

Tapering Food Subsidy

The food subsidy bill is slated to decline by Rs 90,000 crore due to the policy announcement in December to discontinue the additional foodgrain provision under the Pradhan Mantri Garib Kalyan Anna Yojana. In addition, the allocation to the MGNREGA has been lowered by Rs 29,000 crore from Rs 89,000 crore in 2022-23 to Rs 63,000 crore in 2023-24 because, with the revival of economic activities in urban areas, the migrants are expected to return to urban jobs. Perhaps, to keep up with the fiscal adjustment path, it would have been better to front-load the fiscal adjustment this year because it may be difficult to make a significant reduction in the deficit in the election year.

There are a number of other announcements made in the budget which may not have significant macroeconomic implications. The seven focus areas underlined in the budget are basically meant to spread the benefits across the spectrum of people with small allocations and many of them are in the state or concurrent list.  The direct tax policy announcement is mainly aimed at incentivising taxpayers to opt for the new tax regime. Of course, a tax policy without tax preferences is simple and desirable and there is no need to provide options and increase the number of tax brackets. The customs duty changes are basically tinkerings, and the protectionist stance continues.  

On the whole, this is a budget that provides clear signals for rejuvenating investments while traversing the path of fiscal consolidation.

(The author is the Chief Economist, Brickwork Analytics, former director of NIPFP and Member, Fourteenth Finance Commission).