Budget 2023: FM Sitharaman would do well to avoid a ‘populist’ budget

Finance Minister Nirmala Sitharaman.

There’s something out of the ordinary about India in 2023. India will host the G20 summit this year and by the time the heads of state meet in New Delhi in September, the world would have known the answer to a key question: Is a global recession imminent?

With persistently high inflation across the world, driven by an uncertain geopolitical calculus, central banks including in India have resorted to the tested path of increasing interest rates to cool prices. There are signs that this may have had the desired effect, at least in India.

These are early days yet, but if the pattern holds by February, India’s retail inflation could well be in a very comfortable range, within the Reserve Bank of India’s 2-6 percent threshold band.

For the government, especially finance minister Nirmala Sitharaman who is scheduled to present the Union budget for FY24 on February 1, it is critical for this retail inflation’s downward trend path to hold.

Multiple uncertain and moving variables can make budget-making tricky. A cooled inflation environment will take one such variable out of the way, allowing the finance minister and her team at New Delhi’s North Block, where the finance ministry is housed, more fiscal and policy headroom in the budget.

Comfort Level

The RBI has been on a rate-hike course through 2022, increasing policy rates by about two percentage points to fight inflation. Retail inflation had remained above the central bank’s comfort level for almost the entire year.

Wholesale price index-based inflation, a kind of producers’ price index, eased to 5.85 percent in November 2022, a 21-month low. Retail inflation as measured by the consumer price index, a gauge of shop-end prices that mirrors changes in how costly things have become for households on an annualised basis, moderated to an 11-month low of 5.88 percent in November from 6.77 percent in the previous month.

The finance minister will also have another sense of occasion to reckon with in the FY24 budget. This will be the last “full Union budget” before the 2024 Lok Sabha elections.

There will be heightened expectations from the markets as well as the people about plucky policies with a focus on raising people’s income levels, enabling greater investment in infrastructure to generate jobs, boosting farm incomes to keep the rural economy buzzing, and rolling out conducive policies to attract more foreign and domestic investment.

Specifically, a key question that many will keenly watch for in the budget are moves on income tax. These include changes expected on the individual income tax front and the capital gains tax regime.

Capital gains tax is levied on the gains made from the sale of movable and immovable capital assets. Depending on the period of holding an asset, long-term or short-term capital gains tax is levied.

Asset classes such as real estate, equity investments, debt instruments, and mutual funds attract different rates of capital gains tax. Besides, capital gains tax could vary within an asset class too, depending on the holding period and maturity.

Individuals and the salaried class will anticipate changes in income tax slabs. This could well be an opportunity to present a neater, simpler individual income tax slab and rate construct replacing the two-system structure that has been in place since 2020.

In the final analysis, however, Sitharaman would do well to avoid the temptation to present a “populist” budget for the sake of political expediency alone. Sound fiscal policy management can also be politically prudent without being blinded by rank short-termism of electoral calendars.

Gaurav Choudhury is consulting editor, NW18. Views are personal and do not represent the stand of this publication.