The FY24 Budget is an opportunity to consolidate India’s macroeconomic fundamentals for the next couple of years. Even as the developed world’s economy slows in calendar 2023, India is expected to remain a bright spot, with inflation easing and growth remaining robust despite an expected moderation from FY23 levels. The balance that the government’s fiscal policy has demonstrated over the past couple of years – in conjunction with a finely tuned monetary policy – has helped India’s economy emerge relatively unscathed despite a series of public health and economic shocks, deep uncertainty and financial markets volatility.
First, a brief overview of the global and domestic economic conditions. Global economic growth is already slowing and can be expected to further decelerate in 2023, as a result of the synchronised tightening by G-10 central banks. However, domestic demand and economic activity still appear to be resilient. Moreover, while consumer inflation continues relatively high, it is expected to fall in the last quarter of FY23. Despite concerns about a high current account deficit, on the whole, macroeconomic indicators remain balanced, which will allow more headroom for fiscal management.
Second, as the recent RBI Bulletin notes, “Waning input cost pressures, still buoyant corporate sales and turn-up in investments in fixed assets are heralding the beginning of an upturn in the capex cycle in India which will contribute to a speeding up of growth momentum in the Indian economy”. The Budget needs to nurture this still-nascent investment and growth momentum. Since the onset of the pandemic, the government’s stance has demonstrated fiscal discipline and an increased focus on capital expenditure and other policy incentives, the results of which are becoming evident in enterprise growth plans and demand resilience.
Third, on the Budget measures. The likely significantly higher than budgeted growth in (both direct and indirect) tax revenues in FY23 will moderate in FY24. The Budget will have to manage the difficult exercise of continuing on the path of fiscal consolidation, while ensuring that capital expenditures are prudently increased, together with facilitating the projects pipeline so that the allocations are effectively utilised. In line with the finance minister’s declared intent of reducing the fiscal deficit to below 4.5 percent of GDP by 2025-26, we expect the fiscal deficit to be reduced from the budgeted 6.4 percent of FY23 GDP to 5.7-5.8 percent in FY24. Bond markets will react positively to such a reduction, which will help to lower sovereign interest rates in the long maturities, thereby lowering the entire spectrum of borrowing costs. This is crucial for sustaining credit offtake, particularly from the MSME segment, which is crucial for supporting growth.
Revenue expenditures need to be calibrated and hopefully, lower subsidies will open up room for additional spendi
ng on discretionary development-related items, particularly central schemes at the state level. The Union budgets of FY22 and FY23 have been noted for the significant increases in capex spending budgeted – Rs 5.9 lakh crore and Rs 7.5 lakh crore, respectively – and this trend should be sustained in the FY24 budget, although the increase will probably not be as large, given the revenue constraints.
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A further rationalisation and simplification of direct tax structures are also awaited in the Budget, as a gradual reduction in the effective tax burden is important for both increasing household discretionary incomes to boost domestic demand as well as making Indian enterprises more competitive.
Fiscal management must in large part be credited for India’s present outperformance. Even incremental improvements will have an outsized positive impact on the domestic economy, even as prospects for the global economy grow increasingly bleak.Rajiv Anand is deputy managing director of Axis Bank. Views are personal and do not represent the stand of this publication.