Union Budget 2023-24: Firm on prudence, high on feel-good factor

Finance Minister Nirmala Sitharaman on Wednesday presented the Union Budget for 2023-24, which is expected to serve as the last full Budget of Prime Minister Narendra Modi’s second term in office. The Budget, which Sitharaman labelled the first in “Amrit Kaal”, did not vary in its essentials from the growth model that has defined Modi’s second term: bulking up capital expenditure, especially on transport-related infrastructure, while maintaining macroeconomic stability though relative fiscal restraint. 

With some unexpected room being granted to her after nominal growth rates and tax collections were boosted by inflation, the finance minister announced that the fiscal deficit for the ongoing year would be contained to 6.4 per cent of gross domestic product (GDP), in spite of the actual nominal deficit exceeding the budgeted figure by 5.6 per cent. 

The Budget further projected that the fiscal deficit for the coming year would indeed be below 6 per cent of GDP, at 5.9 per cent. Growth for FY24 was assumed to be 10.5 per cent in nominal terms, which is not out of line with expectations. The fiscal consolidation would be enabled by increasing non-tax revenue — including a 30 per cent increase in revenues from the telecom sector and some additional income from the petroleum sector.

In a relief for bond traders, the Budget set the gross market borrowing target at Rs 15.4 trillion with net market borrowing of Rs 11.8 trillion. Disinvestment receipts are budgeted in line with the previous year at Rs 51,000 crore.

The finance minister also signalled that the government was maintaining its commitment to investment-first growth by increasing the capex outlay “for the third year in a row by 33 per cent to Rs 10 lakh crore, which would be 3.3 per cent of GDP”.

Sitharaman used what remained of her fiscal space to announce modest relief for taxpayers. For the “new” income tax regime introduced in 2020, the exemption limit was raised to Rs 3 lakh and the number of slabs rationalised to five. The rebate limit was raised as well to Rs 7 lakh; so those with annual income up to Rs 7 lakh would owe nothing under the new regime. At the top end, the maximum effective tax rate would go down from 42.74 per cent to 39 per cent. Together with the introduction of a standard deduction into the new tax scheme, this is being seen as an effort to switch direct tax payers from the “old”, exemptions-heavy income tax system to the one introduced in 2020. 

The finance minister’s continued focus on infrastructure spending was visible in particular when it came to spending on the transport sector, which in 2023-24 was slated to receive Rs 5.13 trillion of the Budget, up sharply from Rs 3.9 trillion in the Revised Estimates for 2022-23. Many other heads of expenditure saw increases that were in line with inflation or below: defence spending, for example, saw an increase of only 5.7 per cent over the Revised Estimates.  

The Budget also hopes for a compression in some of its subsidy outgo, particularly fertilisers. Fertiliser subsidy came in at a whopping Rs 2.25 trillion in the Revised Estimates, but was due to be reduced to Rs 1.75 trillion in the coming year on the back of the promotion of alternative fertilisers. Food subsidy is also budgeted to decline sharply but, as in the previous year, there might be some slippage here if the free grains under PDS (public distribution system) are extended yet again in 2024. 

Other government priorities in the run-up to the general elections were clearly visible in those schemes that received increased allotments this year. The finance minister said in her speech that “the outlay for [the housing scheme] PM Awas Yojana is being enhanced by 66 per cent to over Rs 79,000 crore”, but in fact that increase has already taken place in the ongoing year, with the Revised Estimates indicating spending of over Rs 77,000 crore.

The Jal Jeevan Mission for rural drinking water will also receive Rs 70,000 crore this year. PM-KISAN direct payments to farmers will be maintained at Rs 60,000 crore. The pandemic-era borrowing guarantee extended to micro, small and medium enterprises will not be discontinued but in fact scaled up, with outlay almost doubling from the pandemic year to over Rs 14,000 crore. The finance minister suggested this would “enable additional collateral-free guaranteed credit of Rs 2 lakh crore”, alongside a decrease in the cost of credit by a percentage point. 

• Fiscal deficit to be brought down by 0.5 point in FY24; govt capex sees big jump for third consecutive year
• Relief for taxpayers as rebate limit increased; customs duty tweaked to boost manufacturing

Another focus for the government is climate-sensitive sectors. Natural farming is a major priority, not only because of its environmental benefits but also because of its hoped-for benefits for fertiliser subsidy levels. The finance minister indicated the hope was that 10 million farmers would adopt it in three years. The prime minister’s commitment to the net-zero transition was also turned into concrete budgetary provisions, with Rs 35,000 set aside to enable capital investments into the transition by the ministry for petroleum and natural gas. 

Some other sectors due to benefit include fintech, which may welcome a progressive data usage policy that allows the use of anonymised data, as was signalled in the finance minister’s speech. Co-operatives in the agricultural sector also continued to be a major focus, with several measures for their benefit mentioned in the speech. 

In what could be seen as a subtle shift away from the looming protectionism of recent years, the indirect taxes section of the speech broadly signalled a rationalisation of the number of basic Customs duties from 21 rates to 13. 

Major changes to regulations and legislation governing the financial sector were also signalled by the finance minister in her speech, but without any specific details. The stock markets’ initial reaction was positive, perhaps partly in relief that no major changes had been made to capital gains tax. Over the course of the day, however, initial gains faded and the Sensex settled with gains of only 0.3 per cent, while the Nifty slipped into the red because of the rout in Adani stocks. Bond yields closed at a six-week low of 7.28 per cent, however, in a sign of confidence that the government would stick to its fiscal glide path and because there were no negative surprises about its borrowing targets.