Three points for the Budget

Of the many things to watch in the Budget, three things-growth, fiscal deficit and stance on trade-will receive special attention from analysts. Getting the tone right will be crucial

The Union Budget is undoubtedly the most important event in India’s policy calendar. The upcoming Budget will be special not only because estimates can be made in near-normal conditions after the pandemic, but it will also be the last full Budget before the 2024 Lok Sabha elections. While the finance minister’s speech and Budget numbers will be analysed in detail by different stakeholders for their economic and political relevance, three aspects will need special attention.

First will be the growth estimate. The assumption for the current fiscal year proved fairly conservative. Both nominal and real gross domestic product (GDP) growth rates, however, are likely to come down in 2023-24. The first advance estimates of national income have pegged the real GDP growth at 7 per cent for the current year. According to the available numbers, real growth in the first half of the fiscal year was 9.7 per cent, which means growth in the second half is projected to be just about 4.3 per cent. Growth in the first half of the year was high, partly because of a weak base. Economic recovery in the first half of 2021-2022 was disrupted by the second wave of the pandemic.

Notably, several forecasters are projecting real GDP growth of about 6.5 per cent in 2023-24. As the covid-related base effect is now out of the way, it is not very clear what will drive growth so significantly over the second half of the current year, particularly when the global economy is expected to slow down and a large part of the developed world is projected to slip into a recession. Besides, inflation is also expected to come down. The wholesale price index-based inflation rate, for instance, came down to 5 per cent in December, compared to an average of 11.5 per cent over the last two years. Thus, the nominal growth in the next fiscal year will be much lower than the projected 15.4 per cent for the current year. Getting this number right would be crucial as revenue and expenditure estimates depend on it. While higher-than-estimated expansion helps, lower growth could lead to problems. The government has done well on this front in recent years by making conservative estimates. Anything above 10-11 per cent could lead to complications later.

The next and also the most important aspect to watch will be the overall fiscal position. Reasonable assumptions in this context would make management easier. The government has reiterated that it would adhere to the fiscal deficit target of 6.4 per cent of GDP in the current year. Given higher-than-expected nominal GDP and tax revenue growth, the government could have aimed for a faster consolidation. Assuming the government spends the additional tax revenue but keeps the deficit at the budgeted level in absolute terms, advance estimates suggest the fiscal deficit as a percentage of GDP would come down to about 6 per cent. Higher nominal GDP and revenue growth, both in the current year and in 2021-22, provided the opportunity for faster consolidation. As growth slows, fiscal consolidation would become challenging, which can also make the higher debt-to-GDP ratio sticky.

The government is aiming to reduce the fiscal deficit to below 4.5 per cent of GDP by 2025-26. If it sticks to 6.4 per cent in the current year, about 2 percentage points worth of consolidation over the next three years would prove difficult. Electoral compulsions may also make faster deficit reduction challenging in the coming years. The government, for instance, has made the distribution of food grains under the National Food Security Act free for 2023. It is highly likely that the provision will be extended. Although this scheme will not have a significant impact on the Budget, the government may want to extend more support.

As the growth is expected to slow down and the much-awaited revival in private investment is likely to be delayed, there are demands that the government should continue to push capital expenditure. While there is merit in pushing up capital expenditure, the government will need to find resources without delaying the fiscal consolidation. Sustained higher deficits could not only affect private investment but also limit policy space. About half of the Union government’s tax revenue goes in interest payment. Further escalation in borrowing would only increase complications. Given the global uncertainty, it will help if the government creates some policy space for itself. The Ukraine war, for instance, can  disrupt the global economy in ways that are hard to predict. It is also worth noting that the medium-term target of 4.5 per cent is itself on the higher side, and sustained consolidation would be required for several years.

Finally, it would be important to see the government’s stance on trade. It has increased tariffs through the Budget over the past several years, which does not bode well for trade and has affected India’s ability to become an important part of the global value chain. A number of multinational corporations are presently reported to be diversifying away from China for a variety of reasons. India could gain from this shift. However, being part of large and complex value chains, some of these firms would prefer jurisdictions with lower trade barriers that would allow the seamless movement of goods. Thus, a significant correction in tariffs would be seen as a step in the right direction and improve India’s attractiveness as an investment destination. India must not let go of the opportunity on the trade front. Higher exports would help attain higher sustainable growth.