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Budget 2023 : A growth budget that leads to lower deficit and capital expenditure should nudge RBI to stop rate hikes, Swarup Mohanty

Overall, a budget coming ahead of a General Election year had been expected to deliver and to a large extent it has.

February 02, 2023 / 05:32 PM IST

Economic Survey 2023, the prelude to the budget, had already shown glimpses of the health of the economy with Gross Domestic Product growth this financial year pegged at around 6.5-7 percent and for FY 24 at 6.5 percent on domestic demand revival and an uptick in capital expenditure.

It had been expected that the Budget for FY 24 will lean towards rewarding taxpayers and it did so.

The personal income tax announcements are indicative of the government's push towards the tax paying citizen to opt for the new tax regime announced in FY 20-21. This regime has now become the default regime and the new slabs are to nudge taxpayers to opt for it. The highest income tax rate has also been reduced to 39 percent (previously 42.74 percent).

This means both small and high-income group taxpayers have some more cash at disposal at the expense of tax sops. This is a significant change from earlier regimes, investors would now have to plan for their finances for both short-term and long-term goals.

They will have to own their financial independence and start investing across financial products. Hopefully this would bring more investors to the capital markets; this will also benefit economy at large and would result in more discretionary spending.

Budget 2023 also targeted the Gross Fiscal Deficit (GFD) at 5.9 percent of GDP for FY 23-24 vs 6.4 percent in FY 22-23. It also maintained a focus on growth by maintaining a capital expenditure push while giving tax benefits to the middle-class to support consumption. A strong budget will also comfort the Reserve Bank of India (RBI) Monetary Policy Committee to review its approach, which may in turn provide some elbow room for an accommodative stance at the margin. If that happens, then the upward movement of the interest rate cycle may peak out soon, which will also be beneficial for taxpayers and investors. Stable or downward interest rate movements would also give a fillip to the equity market.

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While the Indian economy is on a strong domestic wicket it still isn’t immune to external shocks and currency flows. The economy still is looking at a fiscal deficit which is 2.5-3 percent of GDP and a current account deficit on decreasing exports and remittances. Possible opening up of global economies in the latter half of this calendar year could also pose a challenge to India’s overall attractiveness.

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Finance Minister Nirmala Sitharaman clearly elucidated the focus of the government on the following seven priorities:
• Inclusive development
• Reaching the last mile
• Infrastructure and investment
• Unleashing potential
• Green growth
• Youth Power
• Financial Sector

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Most of the listed goals are targeted towards bringing more people into the formal sector who could benefit from the initiatives launched in the present and previous term of this government.

The fruits of the digitisation wave during Covid, when a large section of new investors came to the capital markets, lending both resilience and liquidity to the markets, is not lost on anyone. New programmes may atttract more such investors.

The budget overall, has been able to touch upon many aspects of the economy and has indicated the government's priorities on fiscal prudence, consolidation, a green energy thrust, rural empowerment and the resurgence of medium and small enterprises.

The fine print and further data points will provide clarity on government receipts which would fund these growth plans. Now let’s wait for the Reserve Bank of India’s Monetary Policy action to judge the direction of the economy.

Overall, a budget coming ahead of a General Election year had been expected to deliver and to a large extent it has.

Swarup Mohanty
Swarup Mohanty
first published: Feb 2, 2023 11:43 am