Budget 2023: Uncertain global outlook hasn’t fazed the government but mind the expenditure line

The government has displayed confidence in the domestic economy in this budget and bet bold on capex, even at the cost of slowing revenue expenditure.

The FY23 budget holds critical importance and comes at a time of heightened global volatility. As Indian markets remain glued to the finance minister’s speech, global markets wait for OPEC’s announcement and monetary policy announcements of three major central banks – US Fed, European Central Bank and Bank of England.

As the world continues to speculate on the probability of a recession in major developed markets, the government has displayed confidence in the domestic economy in this budget and bet bold on capex, even at the cost of slowing revenue expenditure.

Rewarding Fiscal Discipline

Importantly, the government has ticked most of the boxes in this budget with its support to spending class, industries, ease of doing business, consumption, green energy and fiscal consolidation. The government’s decision to stick to a target of below fiscal deficit at 4.5 percent of GDP will further instill confidence among investors. The recent episodes of turmoil in the UK’s financial market and chaos in the leveraged economies in our neighbourhood underscore the importance of following fiscal discipline.

This, fiscal restraint, in a way supports consumption, by lowering inflation while reducing debt as a higher fiscal deficit raises the demand for goods and services, and inflationary pressures. A lower fiscal deficit cools aggregate demand and inflation and lowers the pressure on the Reserve Bank of India to tighten. It alleviates the ‘crowding out’ pressure for the private sector and fiscal discipline helps enhance India's financial stability standing, attract foreign inflows and stabilise INR.

Rationalising Big Government

Interestingly, the tax benefits have been designed to make individuals pivot to the new tax regime, and to provide relief to the ‘spending’ class via increased disposable income at the hands of people. The tax rate at the highest income end has also been cut to 39 percent from 42.7 percent.

But this foregoing of effective revenue of Rs 35,000 crore, is a calculated tradeoff that could provide a fillip to consumption at the top end and put a floor under consumption at the lower end of the economy. Additionally, the push for the newer tax regime should also lead to higher compliance over time.

A thrust to greener manufacturing is visible through the allocation of Rs 35,000 crore for clean energy transition and viability gap funding for battery storage, renewable energy evacuation and green credit policy The revamped credit guarantee scheme for MSMEs with the infusion of Rs 9000 crore into the corpus will help the MSMEs at a time when global trade is expected to slow down.

The introduction of the National Data Governance policy, elimination of 39,000 compliances and decriminalisation of 3,400 legal compliances will help cut red tape and enhance ease of doing business.

Betting On Capex

A decisive turn in the investment cycle is expected to form the base for sustained growth and infra push will help India navigate the current global crisis. The government has increased capex by a huge 37 percent compared to the FY23 revised estimates. One of the major handicaps thus far was the lacklustre capital expenditure by the states.

The budget has tried to address this problem by the continued use of a carrot-and-stick approach with regards to conditional state funding. The Fifty-year interest-free loan to states for capex has now been increased to Rs 1.3 lakh crore, which is around 30 percent higher than the FY23 allocation. However, the entire fifty-year loan to states has to be spent on capex within FY24 and will be conditional on states increasing their actual capex.

Total capital expenditure has now jumped more than five times the level since NDA came to power. Doubling down on public capex can help spur growth, jobs and incomes that will support broader consumption going ahead.

Risks Of Lower Revex

While capital expenditure is good over the medium to longer-term, slowing revenue expenditure (revex) can pose challenges of its own with loss of momentum being felt in certain sections of the economy. Budgeted revex for FY24 is slated to grow by a mere 1.4 percent in nominal terms. If interest payments are excluded, budgeted core revex will actually contract by approximately 3.8 percent in FY24.

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Most of the drop in revex can be attributed to a drop in subsidies which are set to contract by around 28.3 percent in FY24. Allocation to agriculture is up by 4 percent from FY23RE, while rural allocation is down by 13 percent YoY as the NREGS allocation is set to decline around 33 percent from FY23RE.

While the Economic Survey released yesterday argues that the recovery is complete at a macro level, pain still exists in some pockets, especially at the bottom of the pyramid. A sharp contraction in core revex can pose problems if distress rises, owing to any global or domestic headwinds, say erratic monsoon.

The latest meteorological models have recently indicated that the El Nino climate pattern associated with extreme heat waves and weak monsoons in India is likely to emerge from July to September. We have been lucky with the monsoon being normal (despite distributional issues) for four consecutive years.

(Sarbartho Mukherjee, economist, M&M, contributed to this article)

Sachchidanand Shukla is Group chief economist, Mahindra & Mahindra. Views are personal and do not represent the stand of this publication.