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NEW DELHI : Finance minister Nirmala Sitharaman on Wednesday delivered an expansive budget amid global economic turmoil, striking a balance between prioritizing growth and fiscal prudence.

In the last full budget before the 2024 elections, Sitharaman tried to address the expectations of large sections of society, including the middle class, small businesses, farmers, women, and high net-worth individuals, offering sops and new schemes.

With nine assembly elections in 2023 and the 2024 general elections looming on the horizon, the Union budget offers glimpses of the ruling Bharatiya Janata Party’s playbook for the next two years.

“First budget of the Amrit Kaal lays a strong foundation for the aspirations and resolutions of a developed India," said Prime Minister Narendra Modi, reacting to the proposals.

Sitharaman’s budget offered a blend of measures designed to spur consumption, such as income tax relief for the middle class, high earners, and working professionals, and a record 10 trillion allocation for capital spending to stoke growth and job creation.

Experts lauded the budget for sticking to the fiscal consolidation path and targeting to contain fiscal deficit to 5.9% of GDP in the year starting 1 April from 6.4% of GDP in FY23.

Sitharaman reiterated the government’s intention to keep the fiscal deficit below 4.5% of GDP by 2025-26.

“This was a workman-like budget that was a pleasant surprise. No big stuff. The capex push has been the key focus area over the last few years. What I liked especially was that there were no tall promises, especially as elections are around the corner," said Pronab Sen, an economist and former chairman of the National Statistical Commission.

However, financing the fiscal deficit could pose a challenge to the government, according to N.R. Bhanumurthy, vice-chancellor of BASE University.

“The continuation of the capex strategy by the government, especially increasing the share of capital expenditure in the overall fiscal deficit, will help sustain the economy’s recovery process. However, financing the 17.8 trillion fiscal deficit is going to be a huge challenge, especially when at a macro level, the strategy seems to be more towards consumption-driven and less towards savings-driven kind of policy," Bhanumurthy said, adding that it could put some pressure on the banking sector.

Growth projections for India have been cut both by Indian and global agencies.

According to the IMF’s World Economic Outlook update, growth in India is set to slow from 6.8% in 2022 to 6.1% in 2023 before rebounding to 6.8% in 2024.

The World Bank has estimated that India’s economic growth will slow to 6.6% in the financial year (April to March) 2023-24 from an expected 6.9% in the current fiscal.

Compared with four priority areas identified in the budget last year, the finance minister outlined seven for 2023-24, calling those the “Saptrishi", which include inclusive development, reaching the last mile, infrastructure and investment, financial sector, youth power, green growth, and unleashing the economy.

To promote self-reliance and encourage domestic manufacturing, Sitharaman corrected the inverted duty structure on major items by reducing import duties on raw materials.

It includes duty reduction on camera lenses for mobile phones and an extension of concessional duty on lithium-ion cells for batteries for another year.

Sitharaman also extended the customs duty exemption on importing capital goods and machinery required to manufacture lithium-ion cells for batteries used in electric vehicles.

The budget introduced steps to cut compliances and promote ease of doing business to support small businesses.

It included an additional infusion of 9,000 crore in the Credit Guarantee scheme from 1 April 2023, with a reduction in the cost of the guarantee by 1%. Providing relief to MSMEs, Sitharaman announced that in cases of failure by them to execute contracts during the covid period, 95% of the forfeited amount relating to bid or performance security would be returned to them by government and government undertakings.

In what may increase the disposable income of individuals to support consumption, the finance minister increased the slab, up to which no income tax is payable to 7 lakh from 5 lakh a year from 2023-24 under the new income tax regime, which will be the default now. The new income tax regime introduced in 2020-21 does not allow for any deductions related to insurance and investments. She also hiked the minimum threshold under the old income tax regime to 3 lakh from 2.5 lakh. In a relief to high earners, the budget also proposed to cut the highest surcharge rate of 37% to 25% in the new tax regime, which covers those earning 5 crore and above.

“After a long time, personal income tax has been given a substantial change which will benefit the middle class. The new tax regime is “attractive as it gives a greater rebate and eases compliance. It also provides for simplified and smaller slabs," the finance minister said during a post-budget press conference.

She added that there was a need to make the new tax regime attractive to make more taxpayers shift to it but added that the older tax calculation system based on exemptions would continue for those who still prefer it.

The markets reacted positively to the budget, with Sensex ending 158 points higher on Wednesday, even as insurance stocks ended lower with the finance minister proposing to limit tax exemptions for insurance proceeds in the budget.

While the budget aspires to ease systems further and improve compliance while pushing investments and raising consumption, an S&P Global Purchasing Manager’s Index for manufacturing released on Wednesday showed moderation in numbers to a three-month low in January to 55.4 from 57.8 in December as output and sales growth slackened.

The 33% increase in capital expenditure outlay in FY24 to 10 trillion captured the government’s emphasis on growth and job creation, as private spending remained lacklustre. The government’s capital expenditure acts as a growth multiplier. The budget also proposed 1.3 trillion of 50-year interest-free infrastructure loans to the states from 1 trillion allocated last year. The capex allocation at 3.3% of GDP is almost three times the outlay in 2019-20.

“Investments in infrastructure and productive capacity have a large multiplier impact on growth and employment. After the subdued period of the pandemic, private investments are growing again. The budget takes the lead once again to ramp up the virtuous cycle of investment and job creation… This substantial increase in recent years is central to the government’s efforts to enhance growth potential and job creation, crowd-in private investments, and provide a cushion against global headwinds," said Sitharaman in the budget speech.

The budget extended the highest ever outlay for the Railways, at 2.40 trillion, about nine times the outlay made in 2013-14. The allocation under PM Awas Yojana was also increased by 66% to over 79,000 crore. The Union budget also announced 50 new airports and helipads while focusing on infrastructure development with higher allocations for key sectors.

“Fiscal consolidation has not been kept on the back burner. We have attended to it. We are respecting the glide path we gave to ourselves two budgets ago," Sitharaman said.

Global rating agencies lauded the balance in the budget. Christian de Guzman, senior vice-president of Moody’s Investors Service, said that the narrower deficit forecast in the Union budget underscores the government’s commitment to longer-term fiscal sustainability and supports the economy amid high inflation and a challenging global environment. “Although changes to the tax regime will forego some tax revenue, the budget predicts largely buoyant revenue on the back of strong nominal GDP growth and gains from the tax administration. This will help to mitigate pressures on debt affordability from increasing debt servicing costs associated with rising interest rates," Guzman said.

The budget also saw a renewed push to digitization, including the setting up of a National Financial Registry to enhance data availability for robust credit assessment and the rolling out of a National Data Governance Policy to encourage R&D by using the Aadhaar and Digi Locker platforms to simplify individual address reconciliation and verification across all regulators.

The agriculture sector, which is estimated to grow by 3.5% in 2022-23, saw a push in the budget with an increase in outlay in the form of an 11% hike in agriculture credit target to 20 trillion for the next fiscal year with a focus on animal husbandry, dairy and fisheries. It also saw the announcement of new schemes, including the “Aatmanirbhar Clean Plant Programme" to boost the availability of disease-free, quality planting material for high-value horticultural crops with an outlay of 2,200 crore and a scheme for fishers called Pradhan Mantri Matsya Sampada Yojana, with a targeted investment of 6,000 crore.

The budget has tried to please all constituencies while trying not to look expansionary. However, the real test of the proposals could be seen in the coming months when the ruling dispensation would taste the voter power during elections.

ABOUT THE AUTHOR
Dilasha Seth
" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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