The Union budget will be presented at a time when India’s economic landscape appears to be relatively stable. GDP growth has been robust, inflation is moderating, the current account deficit is narrowing and corporate results have been healthy. This is not to deny concerns around a weak revival in consumption demand, feeble private investment and global economic uncertainties. Hence, this year’s budget becomes important in terms of the policy direction it provides for sustained economic growth. However, as the national elections will be held in a few months from now, the finance minister will present an interim budget, rather than a comprehensive annual budget.
With the likely announcement of election dates around mid-March, the model code of conduct will come into effect, barring the government from announcing any policy decisions.
Hence no major policy announcements are expected in the upcoming interim budget. Yet, it is important because we could get some sense of policy direction, especially if the BJP is voted back to office.
The following are five areas that we feel would be critical from the budget’s perspective in terms of setting the government’s priorities and policy focus.
First, moving towards fiscal consolidation. India’s general government debt to GDP was at 82 per cent of GDP in 2022-23, with interest payments at around 17 per cent of the total expenditure. This leaves limited scope for more productive government spending. Hence, it is very important that the government continues to focus on fiscal consolidation and move towards a sustainable debt trajectory. We expect the government to broadly achieve the fiscal deficit target laid out for 2023-24. Robust direct tax collections and higher dividend transfers from the Reserve Bank of India and public sector undertakings are likely to compensate for lower divestment this year. With healthy tax buoyancy, we expect a budgeted fiscal deficit target of 5.3 per cent for 2024-25 as the government moves forward on the glide path of achieving a fiscal deficit of 4.5 per cent for 2025-26.
Second, continuing focus on capital expenditure. Post the pandemic the government has increasingly used capital expenditure as a means of propelling growth. The government capex to GDP ratio is budgeted to increase to 3.4 per cent in 2023-24. The government in the last two years has also budgeted for interest-free loans amounting to Rs 2.3 trillion to state governments for capital expenditure. Given the strong multiplier effect of capex on growth, the focus on capex is likely to continue next year as well. We expect the capex to grow by 10 per cent to around Rs 11 trillion, with a continued focus on infrastructure.
Third, the need to spur consumption. The revival in consumption has been relatively weak and appears to be skewed towards the upper-income category. While GDP is estimated to grow by a strong 7.3 per cent this year (as per advance estimates), consumption growth is estimated at only 4.4 per cent. The government has been focussing on capex-led growth, but it is equally important for consumption to pick up. A revival in domestic demand becomes even more critical given the poor external demand scenario. Even while being cognisant of the fiscal limitations, there is a need to come up with measures to spur consumption demand. For instance, a small cut in excise duty on petrol/diesel by Rs 2-3/litre will provide some fillip to consumption and help contain inflation, without significantly disturbing the fiscal mathematics.
Fourth, increased spending on human capital. India is in a unique position of enjoying a large working-age population at a time when most economies are struggling with an ageing population. However, for the economy to enjoy the demographic dividend, the government must invest in human capital. This requires a significantly higher expenditure on health, education and skilling so that the working-age population is equipped to be meaningfully employed. The general government spending on social services (primarily health and education) has been budgeted to increase to 8.3 per cent of GDP in 2022-23 from 6.7 per cent in 2017-18. However, this compares poorly with some of our global peers. For instance, for many European countries, government spending on social services is more than one-fifth of GDP. Given that a large part of India’s population is dependent on the government for these services, it is critical to increase the spending on these services.
Fifth, a focus on agriculture and the rural sector. Rural India is home to 65 per cent of the country’s population and has a large dependence on the agriculture sector. Agriculture productivity in terms of GVA (gross value added) is a third of that in China and around 1 per cent of that in the US. Measures to improve productivity in the sector will help improve rural incomes. This could be done through the adoption of the latest technology and by boosting rural infrastructure. Appropriate skilling of the rural workforce and enabling them to move to the manufacturing and services sectors will also help to reduce the large reliance of the rural workforce on the farm sector. India cannot sustain its growth story with its rural areas in distress. Hence, focussed attention on improving rural health is the need of the hour.
Apart from the broad areas listed above, many others warrant attention. For instance, the need to create an enabling environment for businesses to thrive, the focus on environment-related issues, and the upliftment of the marginalised section of society are some other issues to watch out for in the budget.
This is the time to focus on the quality of growth. To ensure that it is equitable, sustainable and green.
The writer is Chief Economist, CareEdge
This is the time to focus on the quality of growth. To ensure that it is equitable, sustainable and green
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27.01.2024
The Union budget will be presented at a time when India’s economic landscape appears to be relatively stable. GDP growth has been robust, inflation is moderating, the current account deficit is narrowing and corporate results have been healthy. This is not to deny concerns around a weak revival in consumption demand, feeble private investment and global economic uncertainties. Hence, this year’s budget becomes important in terms of the policy direction it provides for sustained economic growth. However, as the national elections will be held in a few months from now, the finance minister will present an interim budget, rather than a comprehensive annual budget.
With the likely announcement of election dates around mid-March, the model code of conduct will come into effect, barring the government from announcing any policy decisions.
Hence no major policy announcements are expected in the upcoming interim budget. Yet, it is important because we could get some sense of policy direction, especially if the BJP is voted back to office.
The following are five areas that we feel would be critical from the budget’s perspective in terms of setting the government’s priorities and policy focus.
First, moving towards fiscal consolidation. India’s general government debt to GDP was at 82 per cent of GDP in 2022-23, with interest payments at around 17 per cent of the total expenditure. This leaves limited scope for........
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