Budget 2023 must target fiscal consolidation while supporting specific sectors: NIPFP’s Pandey

India’s Finance Minister Nirmala Sitharaman is due to present her budget for the next financial year on February 1 amid heightened expectations that the government would keep the focus on lowering the deficit towards the medium-term target of below 4.5 percent of GDP (gross domestic product) by 2025-2026.

Various sectors have shared their list of demands with the Finance Minister, who also has to tackle the headwinds to growth from a looming global slowdown as well as the risks from a resurgence of Covid in China. Further, the full impact of the sharp monetary tightening is yet to play out, and would likely constrain spending in the year ahead.

Edited excerpts:

What’s your assessment of the medium-term growth potential?

Given the global headwinds and the uncertain environment, 6-7 percent is good medium-term growth for a country like India. I think it is reasonably good in this challenging environment.

What should the upcoming budget do to drive growth, given the inflation and global situation?

The budget needs to focus on a number of sectors which still require handholding and support, while at the same time managing fiscal consolidation. There is a tightrope walk required between supporting some sectors, continuing with frontloading capital expenditure, and managing fiscal constraints.

This is a challenge because 2023 is going to be a difficult year. We saw a lot of aggressive monetary policy tightening both in advanced countries as well as in India. Its impact will be visible starting next year. There could be a demand slowdown, there could be a recession. The IMF has said that a third of the global economy may sink into recession.

One priority is boosting capital expenditure. The Chief Economic Advisor has said that the private sector needs to become the prime engine of investment. But given the uncertain environment — though we are seeing some green shoots of recovery in private investment — it is not clear whether those green shoots would be sustained over the coming quarters because inflation still is a problem, monetary tightening will likely continue, and growth slowdown will happen. Therefore, the union government has to do the heavy lifting in terms of capital expenditure.

The other priority is the manufacturing sector, where we saw a slowdown even before Covid. Some part of the slowdown can be attributed to input cost pressures and global headwinds, but there are some structural issues that need to be addressed. The budget can be a good opportunity to address some sector specific issues.

Some of the labour-intensive manufacturing sectors need to be prioritised, because employment is a problem. Their sector-specific issues need to be thoroughly thought through and addressed.

The emergency credit line guarantee scheme has helped alleviate stress in MSMEs, but they are still vulnerable because of the rise in prices of raw materials, and slowing demand. The policy support that was provided to the MSMEs needs to be continued at least for one more year.

What should be the fiscal deficit target?

The deficit target for this fiscal is likely to be met. There could be minor deviations, but it is not a problem as of now because of robust tax revenues.

Going forward, the reduction has to be gradual and not very steep given that there would be unanticipated expenditure commitments coming up over the course of the year depending on the Covid trajectory. So the fiscal deficit target should be about 6 percent of GDP in the next financial year.

Your view on the reasons behind the recent tax buoyancy? Do you expect this trend to continue into the next year?

It is a combination of a number of things. Better compliance and strict enforcement are definitely major reasons, but the corporate tax cut and the improvement in corporate margins are also reasons for the buoyancy in corporate taxes.

GST is doing well again due to a host of factors. One is that domestic demand is picking up, but also, GST collections are higher because of higher inflation. Regarding corporate margins and profitability, as of now things look okay, but going forward things are likely to remain under strain due to global headwinds.

Your take on the fiscal implications of the government giving free food grains for a year.

It seems to be a fiscally prudent move in comparison to the extension of the Pradhan Mantri Garib Kalyan Ann Yojana. The extension of the PMGKAY would have led to an additional outlay of more than Rs 1 trillion a year. By making the distribution of food grains free under the PDS, the food subsidy outlay is likely to be Rs 2 trillion, which is seen to be the usual food subsidy burden in a normal year. The move is also consistent with lower food grain availability in public stocks. It needs to be seen how funds are allocated on growth-enhancing measures.

Do you expect changes to personal and capital gains taxes in the budget?

In India, domestic consumption demand is the main driver of growth. Taking that into account,  the tax slab could be raised from Rs 2.5 lakh to Rs 5 lakh. It will send out a positive signal. It will help improve the disposable income of people and enhance spending.

On the revenue side, from the government’s point of view, it won’t make much of a difference. So that could be a very significant measure that the government could announce in the budget to promote domestic demand, given that export demand will remain tepid.

They should rationalise capital gains taxes. It has been a long-standing demand.

What’s your expectation on the monetary policy front?

If we look at last month’s inflation number, we are below 6 percent but we should not be complacent about inflation. Interestingly, the pattern and structure of inflation is changing. It used to be driven by food prices, but now it is driven by core inflation (excluding food and fuel). That is something that needs to be watched out for.

Core inflation has remained above 6 percent over the last couple of months, and though the headline inflation has come down, core inflation has inched up further.

Bearing that in mind there is merit in keeping a close vigil on inflation through moderate rate hikes, and then taking a pause.