India’s latest budget succeeds in hitting all the right notes
3 min read 02 Feb 2023, 02:37 AM IST- It does well on promoting growth without rocking the macro boat
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The budget for 2023-24 was presented against a challenging macro-political backdrop. Unlike the previous two years, the boost to revenues from elevated nominal GDP growth is unlikely to be repeated; dark clouds owing to a global slowdown mean India’s real growth is likely to slow; and general elections in 2024 meant political compulsions.
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The budget for 2023-24 was presented against a challenging macro-political backdrop. Unlike the previous two years, the boost to revenues from elevated nominal GDP growth is unlikely to be repeated; dark clouds owing to a global slowdown mean India’s real growth is likely to slow; and general elections in 2024 meant political compulsions.
In the event, the budget scores high on multiple parameters: it has steered clear of pre-election populism, played the right counter-cyclical role and continued fiscal consolidation, all the while staying the course on medium-term reforms.
In the event, the budget scores high on multiple parameters: it has steered clear of pre-election populism, played the right counter-cyclical role and continued fiscal consolidation, all the while staying the course on medium-term reforms.
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With elections coming up, the overall focus in the budget towards the common man, the farmer and the middle-income class is not surprising, but there is no outright populism.
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The changes in personal income tax rates to incentivize more households to shift to the new tax regime is a sound idea, although we doubt this will boost household consumption. Consumption is driven by many factors, but job and income certainty are paramount. A cut in taxes ends up being saved when uncertainty is high, something we expect in the coming year.
For agriculture, the budget has presented excellent ideas to boost productivity by using digital public infrastructure and setting up an accelerator fund for startups, instead of doling out freebies.
A big surprise has been the substantial ramping up of capital expenditure to 3.3% of GDP in 2023-24, from an already elevated 2.7% in 2022-23, and a step up from an average of 1.7% during the four years through March 2020. This suggests the government does not believe there is a durable pickup in private capital expenditure yet.
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We agree with this assessment. Yes, corporate and bank balance sheets are stronger, but weak global demand will lower capacity utilization rates and delay any pickup in private investments until there is more certainty. Hence, we believe higher public capital expenditure is unlikely to crowd out private investment, as some fear, and will instead play a counter-cyclical role and build the infrastructure India needs. The creation of jobs is tied closely to the investment cycle picking up.
The broader budgetary push for infrastructure, agriculture, manufacturing, supporting MSMEs and tax rationalization are consistent with the direction chosen over the last several budgets. Importantly, the budget also aims for India to achieve green growth by reducing dependence on fossil fuel imports, with more investments in an energy transition and through the country’s green credit programme.
In the near-term, the assumptions underlying the 5.9%-of-GDP fiscal deficit target for 2023-24 will get challenged as the year progresses. The budget has assumed nominal GDP growth of 10.5% in 2023-24, whereas we see real GDP growth at around 5.1% and nominal GDP growth at around 8.5-9.0%. The reason is simple. Industrial production and export growth are already on a downtrend, and as the US and European economies slide into recession this year, exports will slump further. The share of India’s exports to the US and Europe combined at 35.5% of total exports is much higher than to China (5.8%), which limits direct spillovers from China’s reopening.
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Weak exports will likely mean weak private investment—hence a public capex push is a good idea—and the impact of policy rate hikes on discretionary demand is yet to be fully felt. Tax buoyancy is closely linked to nominal growth and the phase of business cycle. So, if demand moderates, as we expect, then both nominal GDP growth and tax revenue growth will undershoot.
The assumption on revenue expenditure growth of only 1.2% also appears low, considering the bulk of this spending is sticky. The available cushion from lower food and fertilizer subsidies has already been incorporated in the budget estimates, which means the risk of total expenditure ending up higher than currently assumed. Other assumptions on disinvestment and non-tax revenues appear realistic, but the risks are skewed towards a higher fiscal deficit.
The government can still meet its 5.9% fiscal deficit target by cutting back on capital expenditure. But if growth slows, there could be a stark trade-off between growth and fiscal consolidation. We see these challenges in 2023-24’s second half, but managing market borrowing should not be hard.
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Higher deposit rates and slower nominal growth would mean that the incremental credit-deposit ratio will start to moderate. India’s monetary policy hiking cycle is also in its final leg, and a more favourable interest rate outlook should increase demand for bonds from banks and other investors.
Overall, it’s a growth-oriented budget aimed at ensuring India’s economic resilience over the long-term—all without rocking the macro boat.
Sonal Varma is chief economist, India and Asia ex-Japan, at Nomura
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Updated: 02 Feb 2023, 02:37 AM IST