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Top budget 2023 expectations: From tax relief to consolidation of fiscal deficit

Rising interest rates in US led to capital outflows from India and rupee depreciated by 11 percent in 2022.  (HT)Premium
Rising interest rates in US led to capital outflows from India and rupee depreciated by 11 percent in 2022. (HT)

  • Last three years were challenging for the Indian economy. The pandemic Covid-19, Russian invasion of Ukraine and the American central bank’s tight monetary policy impacted the global economy and India, too, was impacted.

The last three years were challenging for the Indian economy. The pandemic Covid-19, Russian invasion of Ukraine and the American central bank’s tight monetary policy impacted the global economy and India, too, was impacted. Covid dealt a heavy blow to India’s large informal economy resulting in massive job and income losses. Increased government spending on food security and fertiliser subsidy increased the fiscal deficit. Rising interest rates in US led to capital outflows from India and the rupee depreciated by 11 per cent in 2022.

Indian economy is strong in the challenging global environment

As the finance minister Nirmala Sitaraman prepares to present the Union Budget 2023, the economic situation is much better now. India is presently the fastest-growing large economy in the world. GDP growth in FY2023 is expected to be 7 per cent. This is around 3 per cent higher than in any other large economy. For the next financial year also, India would be the fastest-growing large economy. High GDP growth has led to better-than-expected tax collections. The banking sector is healthy with low NPAs. Credit growth at 17 per cent is impressive. While our neighbours Sri Lanka, Pakistan and Bangladesh have approached the IMF for assistance, India is in a strong position with adequate foreign exchange reserves of $ 550 billion. The IMF chief described India as a bright spot in the dark economic horizon.

While these are silver linings, the finance minister cannot ignore some dark clouds looming on the global economic horizon. The global economy will slow down sharply in 2023. The three major engines of global growth – the US, China and the Euro Zone – are in a sharp slowdown. This will impact global trade and India’s exports, too, will be impacted. Consequently, India’s growth in 2023 will be lower in the next year and the finance minister cannot expect the tax buoyancy this year to continue next year. At the same time, the finance minister has to reduce the fiscal deficit as promised last year. Also, the FM has to continue the capital expenditure programs to sustain growth in the economy. Since 2024 is the General Election year, this budget will be the last full budget of the government. Therefore, some popular announcements like income tax relief for the middle class also can be expected in the budget.

Reduction of fiscal deficit should be the top priority

India’s fiscal deficit and current account deficit are under control but continue to be high. Financial stability will be impacted unless the deficits are brought down. Last budget’s fiscal deficit target of 6.4 % of GDP will be easily achieved since the tax collections have been buoyant and the nominal GDP growth will be 15.1 per cent this financial year. This favourable scenario is unlikely to repeat in the coming year. Even in this challenging situation, the FM should stick to a fiscal deficit target of 5.8 per cent for FY2024. Financial stability needs fiscal discipline.

Thrust on infrastructure

There is impressive growth in India’s infrastructure. Projects like Bharat Mala, Sagar Mala and Gati Sakthi are transforming the economy’s infrastructure. India’s highway network has doubled in the last 10 years; airline traffic has tripled and broadband connectivity has multiplied 40 times. The JAM (Jandhan, Aadhar, Mobile) trinity has created an automated social security network. The thrust of the government on infrastructure will continue in the 2023 Budget, too.

Income tax relief

The basic exemption for income tax at 2.5 lakhs was fixed in 2014. Upward revision in the exemption limit is necessary and can be expected in the budget. The FM is likely to announce relief in the ‘new income tax regime without exemptions’. Some changes in the capital gains tax also are likely. Since indirect taxes come under the GST council there will not be any major announcements there.

Budget 2024 is also important from another angle. This would be the first Budget after India assumed the presidency of G20. G20 strives for stable economic growth and global prosperity. Therefore, the FM can be expected to deliver a message of good economics avoiding negative populism.

Author: Dr. VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services

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