This budget, to be presented on February 1, 2024, would be a vote-on-account, allowing the next government to present a full budget in July 2024. However, there is no let-up in the enthusiasm, flurry of activity, often associated with a full-fledged budget.
Given that it is a vote-on-account, will the budget attempt any major reforms or path-breaking initiatives? Or, will this be what I call the “keep in cruise mode” effort?
Let us first take stock of the lay of the land. As the Indian economy is expected to grow around the 7 percent mark for the current fiscal, enabled by a strong resilience across key sectors and some signs of a recovery in private investment, there is a need to discuss an accelerated fiscal consolidation chart. Beginning with a lower capital expenditure by the government, which has sustained the tempo since 2021 Budget, the strategy could include lesser subsidies, potential opportunities in PSU divestment achieved in a time bound manner.
In fact, the government spending is also expected to play a crucial role in the Reserve Bank of India’s (RBI) fight against inflation hence a lower capex could be a relief in more than one way.
The subsidies that account for 8 percent of the budgetary outlay, need to be trimmed to manage the fiscal deficit through a spending consolidation, with adequate precaution, not to harm the rural demand. We need some initiatives to sustain rural household incomes. For example, the focus can move from urban to rural infrastructure to improve the rural cashflow.
As India outshines the rest of the world in the overall macro framework, we need to focus on reducing the public debt-GDP ratio - the factor where India lags its peers. India’s government debt-GDP ratio stays elevated above 80 percent, compared to sub-75 percent pre-pandemic.
The two key drivers of achieving the pre-pandemic trends will be:
Strict fiscal consolidation roadmap over the next few years (the Centre has committed to a sharp consolidation of fiscal deficit to near 4.5 percent of the GDP by FY26 from the current estimated levels of 5.9 percent. This trend needs to further accelerate to ensure the consolidated fiscal deficit for the Centre and state will settle around 5-6 percent of the GDP, compared to the current levels of near 9 percent).
Along with fiscal consolidation, the other necessary condition for the fall in debt-GDP ratio will be a consistent nominal GDP growth of 11.5-12 percent to ensure the ratio falls to sub-75 percent by the end of this decade.
On the food subsidy side, there is a challenge given a shift in the regime towards free grain distribution under the National Food Security Act. Further, the increase in minimum support prices as already announced for wheat and to-be-announced for paddy will necessitate increase in allocation under this category. On the other hand, there could be some room for pruning fertiliser subsidy as prices have normalized lately.
Being a vote-on-account, I suspect the finance minister may avoid making major policy announcements and just signal initiatives in these directions and articulate intentions in the medium term, somewhat like a 'manifesto'!
Having said that, the finance minister will do well to give clarity in several operational issues and ease of business issues could be attempted. Issues like a simplified Capital Gains Tax regime can be attempted. Many industry bodies and organisations have raised the complexity in Capital Gains Tax structure that lacks standard rates or holding periods for different types of instruments within the same asset class.
They have even pointed out that even the TDS varies as per the status of payees or the nature of payments. There is also an expectation that the current tax-free long term capital gain (LTCG) ceiling on sale of equity shares, equity oriented mutual funds and units of a business trust would be hiked. Markets will appreciate this move.
The ambitious plan of the Ministry of Road Transport and Highways to cut the country’s logistics costs might get more focus. Announcements regarding green highways and industrial corridors that would cut logistics costs and access to rural hubs may be unveiled, besides projects for urban renewal and sustainable energy. As the last-mile delivery points, ports, air cargo and shipping facilities may get upgradation funds, giving the priority to overall efficiency in transportation.
Given the high focus on a carbon-neutral economic structure, one may expect more announcements to encourage industries and businesses to move to cleaner energy. Progressively, one may expect more and more such special green announcements in the budgets.
Some of the sectors that have immense export potential may also get more sops. Incentives to manufacturing companies with a focus to generate employment is an area where the finance minister may look to counter detractors of this government on the employment generation front. In the absence of China taking any big strides in the global markets since the outbreak of the pandemic, the vote-on-account provides an opportunity to outline significant steps the government can roll out under the prime minister’s favourite manufacturing initiative ‘Make in India.’
In the personal income tax area, the finance minister may look at further expanding the slabs marginally to enhance the disposable incomes ahead of the general elections. With relatively higher inflation and the monetary policy rate hikes fully transmitted, resulting in higher EMIs some sections are feeling the pinch. This increase in disposable income may be a welcome relief. This will also keep the consumption momentum of the economy apart from being broadly popular.
At a time of increasing geopolitical conflicts in the region and an uneasy calm prevailing, the world looks upon us with high hopes and the interim budget could do well to sustain those hopes.
The author is the whole-time director of Kotak Mahindra Bank. The views and opinion expressed in the column are personal and do not necessarily reflect the opinion of the organisation or the Kotak group.
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