Budget Breakdown: How to make sense of the 2023 edition with answers to 14 big questions

What is the Budget? Why should I read this explainer?

At its simplest, the Budget is an annual financial statement — the government’s plan for spending and fundraising over the next financial year. In India, however, the Budget is a bit more than that. The Union Budget also presents a roadmap of expected policy changes, ranging from incentives for industries to personal income tax. It also indicates the government’s thinking on where the economy is headed.
Secondly, the government is a key player in the real economy and financial markets. The size of government spending is about 15 percent of gross domestic products (GDP). Its borrowing from the markets influences interest rates, and ultimately, the equated monthly instalments you pay on your home and car loans.
You should read this explainer to understand how the Budget impacts you in several ways, directly and indirectly.

What were the expectations from this Budget?

Ahead of every Budget, there is a laundry list of expectations from every conceivable stakeholder and interest group such as industries, consumers, investors, senior citizens, and jobseekers. The expectation for sops is particularly heightened in pre-election Budget years like this one: tax relief, increased allocation towards social sectors like healthcare and education, boosting manufacturing and infrastructure creation, which in turn would lead to more jobs, measures to promote growth in a slowing world, and not spending extravagantly (a situation that could lead to spiralling interest rates) topped the list of demands.

Did the Budget meet expectations?

It is difficult to please everyone. Anyway, pleasing everyone is not necessarily the right way forward for the economy. That said, some of the top expectations were met. The Finance Minister cut income tax not only for the middle class but also for the ultra-rich. She reduced import duty on inputs for several products, which will encourage businessmen to make them in India while also creating jobs. She announced a significant increase in spending on creation of assets such as roads, airports and green energy generators; this will lead to a rise in demand for several other goods and create jobs in the process.

The bond markets were pleased because the net market borrowing of the government has not changed much from the current year’s numbers.
What does the Budget do to boost economic growth?
First of all, it is important to note that India’s economic growth is projected to slow in FY24 because of lower global growth, which will impact our exports, the base effect, the ebbing effects of the post-pandemic spending boost (which some called revenge spending), and rising interest rates. That said, the Economic Survey pointed out that recovery from the impact of the pandemic is complete and the economy is set to accelerate in the medium term.

A Budget can boost growth by increasing spending, incentivising businessmen to invest, or putting more money in the hands of the people, encouraging them to spend. It has left people with more money by cutting personal income tax and by making certain goods cheaper. But this is not much.

It has also not increased overall government spending wildly. Total government expenditure in FY24 is budgeted to rise 7.5 percent over the current year’s number. But what the Finance Minister has done is to focus on the quality of spending. By this, we mean that she is spending more on asset creation — capital expenditure is up by a third to Rs 10 lakh crore. As Nirmala Sitharaman said in last year’s announcement, every rupee spent on capital expenses generates Rs 2.95 in output, besides creating jobs.
This will boost economic growth in the medium term rather than have an immediate impact. Overall, the government expects nominal GDP (not adjusted for inflation) growth of 10.5 percent in FY24 compared with a 15.4 percent forecast for FY23.

What is the government’s spending plan? Why isn’t it spending more to boost growth?

Just as people carefully match their income and expenses so that spending does not spiral out of control and leave them in heavy debt, the government too has to be mindful.
In emerging economies like India, government spending often needs to outstrip revenue generation capabilities. The difference between revenue and expenses, called the fiscal deficit, is one measure of the economy’s health. India’s fiscal deficit at 6.4 percent of GDP is already larger than that of peers. The finance minister has targeted to narrow it down to 5.9 percent in FY24 and below 4.5 percent in FY26.
The fiscal deficit has to be financed from somewhere—a huge chunk comes from market borrowing. When the government competes with private players for funds in the market, the overall level of interest rates rises.
Remember that the government is already feeling the brunt of past borrowings. Interest payments eat up a quarter of the overall government spending.
That’s why the government has chosen to rejig its spending priorities rather than increase the absolute amount of its expenditure by a large margin.

What does the Budget do about job creation?

As mentioned earlier, the focus on capex spending can generate jobs for the masses, especially in newer areas such as green energy. It has also rolled out a National Apprenticeship Promotion Scheme that will give stipend support to 4.7 million youth in three years through Direct Benefit Transfer.
Further, the finance minister talked about tapping the large potential for jobs and entrepreneurship in tourism and promised to promote the sector in mission mode. That said, the allocation for tourism in FY24 is unchanged from last year’s Rs 2,400 crore.

So, which sectors have lost out from the rejig in spending?

The rural sector and farmers could well feel aggrieved about this year’s budget. The allocation under the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is at a six-year low. Funds set aside for the education sector are 8.3 percent higher than the FY23 budget estimate and for health, it is 2.7 percent higher. Defence spending is up a mere 5.7 percent compared to the revised estimate as the government expects pension payments to come down. The allocation for food subsidy is down by about one-third.

What about the government’s fundraising plans?

The government’s total fundraising can be divided into two broad categories. One part is revenue receipts, which consist of tax collections, interest received, dividends and profits and so on. This portion is estimated to rise 12.1 percent in FY24.
The other part is capital receipts consisting of funds borrowed from the markets, from small savings schemes, sale of shares in public sector enterprises and so on. This is estimated to rise 1.7 percent compared to 13.2 percent in FY23. This is one reason why the market is pleased with the Budget.

If the markets were pleased, why did they fall on Budget day?

The Budget mostly met market expectations. But some sectors did feel the impact of unwelcome tax changes. The hike in duty on cigarettes hit tobacco stocks. Insurance companies fell because the personal income tax changes do not incentivise people to save and therefore their premium collections could fall. There was an increase in tax collected at source on foreign spending, which could impact travel and tour operators.
But there were positives as well for sectors such as infrastructure and banks.

Overall, the fall in stocks can be attributed to factors beyond the finance minister’s statements. Adani Group shares, which have been under fire recently after a short seller put out a negative report, have soured overall market sentiment. Besides this, the mixed bag of third-quarter earnings, the high premium that Indian stocks enjoy over other emerging markets, and slowing inflows in domestic mutual funds are impacting returns.

What should I know about personal income tax tweaks?

If your total income does not exceed Rs 7 lakh, then you will not have to pay any income tax. Further, the number of tax slabs has been reduced under the new tax regime —where you can’t claim exemptions—and reduced for certain income categories. Which tax regime, old or new, will ultimately benefit you more depends on the exemptions you claim. For more details on these changes and how to choose between the two, read this and this.

Which other constituencies can feel pleased?

The elderly, for one. The maximum deposit under the Senior Citizen Savings Scheme (SCSS) has been doubled to Rs 30 lakh. The scheme offers assured interest of 8 percent per annum.
Investors in the Post Office Monthly Income Scheme (POMIS) can invest up to Rs 9 lakh from Rs 4.5 lakh earlier. In the case of joint accounts held in POMIS, the investment limit has been raised to Rs 15 lakh from Rs 9 lakh.
The finance minister announced a one-time small savings scheme for women, which will be available till March 2025. The scheme will have a tenure of two years and will offer a fixed rate of interest at 7.5 percent and the maximum deposit amount has been capped at Rs 2 lakh.

What about companies?

Apart from duty cuts, which will boost Make-in-India, the Budget made sundry announcements on the ease of doing business. For example, Permanent Account Number (PAN) will be used as the common identifier for all digital systems of specified government agencies. A new dispute resolution scheme for contractual disputes—Vivaad se Vishwas 2—is in the works.

What does the Budget do for climate change?

The finance minister said green growth will be a priority sector for the government. Key announcements include a Rs 35,000 crore allocation for green energy transition and viability gap funding (a form of financial support) for battery storage.
But the impact of Climate Change is most often felt by agriculturists and the poor. Here, the funds set aside for agriculture and allied sectors is down to Rs 1.44 lakh crore from Rs 1.52 lakh crore. Clarity is also needed on other allocations towards green growth.

What is the overall takeaway from the budget?

While eschewing overt populism, the Budget has clearly tried to woo the middle-class while keeping the markets, businesses and rating agencies happy. The finance minister has tried to restrict spending within the government’s means while trying to boost growth via capital expenditure and ‘crowding in’ private investment, a strategy yet to pay dividends.
There is no reason to fault the Budget numbers. However, plans seldom survive contact with the enemy. We will have to see how much the actuals stick to the budgeted estimates as time goes by and the elections draw near.