In terms of GDP at the current exchange rate, India is already the fifth-largest economy in the world and aspires to become the third-largest economy by surpassing both Germany and Japan in a few years. India has meticulously planned to achieve this status by spending heavily on infrastructure and structural reforms in recent years notwithstanding the challenges thrown by the Covid-19 pandemic. India is celebrating the Amrit Kaal beginning this year and is prepared to convert any challenge into opportunity with the help of a young population, a technologically sound financial system, and a stable government committed to building a new India. The union budget for 2023-24 (hereafter FY24) is a big leap forward in this direction. The visions of the budget are clear – sustainable growth, inclusive growth, and green growth, which are packaged under seven priority areas (Saptarishi, elaborated later). In a digital age, budget numbers typically become prosaic within 24 hours, although the budget remains relevant at least for the full financial year. The budget for FY24 – the maiden budget of India’s Amrit Kaal – would be remembered as a historic budget that has given the foundation for the next 25 years.
An attempt has been made here for an objective evaluation of the budget and to draw some conclusions on the likely impact of the budget proposals. Section I assesses the macroeconomic situation under which this year’s budget is presented; Section II evaluates the credibility of budget numbers; Section III deals with each vision and the corresponding initiatives proposed in the budget; and Section IV visualizes the probable impact of the budget.
I. Macroeconomic Situations
I.1 Global Headwinds
The global headwinds were many when India’s union budget for FY24 was presented. First, recession fears were elevated in major developed countries, mostly due to tight monetary policy being pursued by several strategically important central banks. According to the IMF’s January 2023 update of the World Economic Outlook (WEO), the global GDP is expected to grow at 2.9% in 2023 compared to 3.4% in 2022, with large contributions coming from developing countries. Second, the world trade volume (goods and services) is projected to grow at 2.4% (below the global growth rate) in 2023 as against 5.4% in 2022, which may hamper exports from developing countries. Third, the downward adjustment of global commodity prices – mostly food, and energy prices – may slow down due to recent improvements in the global economic outlook. Fourth, core inflation is stubbornly sticky in most parts of the world. Despite some moderation, retail inflation in western countries remains way above their targets and therefore the fight against inflation is not over. The Fed Reserve, the Bank of England, and the European Central Banks have not yet reached the peak level of policy rates in the current tightening cycle. Fifth, capital flows to EMEs remain highly uncertain due to rising interest rates in developed countries besides growth slowdown. Sixth, the Russia-Ukraine war remains unresolved which prevents the global value chain to restore fully.
I.2 Domestic Challenges
According to the government, India’s real GDP is projected to grow at 6.5% in FY24 compared to 7% in FY23 (first advance estimate by CSO). Global think tanks believe that India is a ‘bright spot’ in an otherwise gloomy world. India’s growth is certainly resilient but below its potential. Private capex remains weak, although capacity utilization is inching toward the long-period average. Pickup in the credit cycle is constrained by the rise in interest rates. The informal sector is not fully recovered post-Covid, which needs policy support. Upside risks to inflation remain high as the core inflation is sticky at around 6%. The external current account deficit is likely to widen in FY24 if crude oil prices remain elevated. India’s stock prices are relatively overvalued due to the high price-earnings ratio compared to all major economies. Global contagions have the potential to destabilize financial stability by affecting both stock prices and exchange rates. The budget was expected to insulate the economy against global headwinds.
While the agriculture and services sectors have recovered significantly after the Covid-19 pandemic, the manufacturing sector is not doing well. Despite reasonably high manufacturing PMI (Purchasing Managers’ Index), the value added by the manufacturing sector to GDP is likely to grow hardly by 1.6% in FY23 compared to 9.9% in FY22. This is indicative of the informal sector not being recovered to the pre-Covid level, which warrants budgetary support for some more time.
II. Credibility of the Budget Numbers
The Union Budget FY24 continues to build on the vision of Atma Nirbhar Bharat and is committed to pursuing structural reforms that started in 2014. The major challenge before this year’s budget was to strike a balance between sustaining fiscal consolidation and providing as much impetus as possible to sustain high growth through large capital expenditure. This year’s budget stood up to the challenge and proposed to achieve both – capex-heavy fiscal consolidation. The capital expenditure is expected to be historically high at Rs.10 trillion in FY24 and at the same time, the gross fiscal deficit (GFD) as a proportion to GDP may remain at 5.9% – 0.5% less than the previous year (Table 1). The glide path for fiscal consolidation visualized in the FY23 budget remains intact, at least for the time being. If grants-in-aid to the states are added, the effective capital expenditure would be Rs.13.7 trillion in FY24. Sticking to fiscal consolidation is possible either by additional resource mobilization or through a cut in revenue expenditures. The net resource mobilization in the FY24 budget is likely to be negative (Rs.35,000 crore) mainly due to cuts in basic customs duties. Hence, there is no additional tax burden on taxpayers in the FY24 budget which may boost their discretionary consumption. Pruning revenue expenditures is always a daunting task for any government particularly when inflation is positive. In the FY24 budget, there is a sizable cut in food and fertilizer subsidies, which had gone up phenomenally during recent years due to the Covid-19 pandemic. The decision was taken before the budget was announced to reduce entitlements under the public distribution system. Still, it may be difficult to achieve only 1.2% growth in revenue expenditures in FY24 over the previous year.
Table 1. Capex-Heavy Fiscal Consolidation
|* GFD at ₹17.87 trillion (5.9% of GDP) in FY24 as against ₹17.55 trillion(6.4% of GDP) in FY23 (RE) and ₹15.85 trillion (6.7% of GDP) in FY22.|
|* Net market borrowing at ₹12.31 trillion in FY24, as against ₹11.96 trillion in FY23 (RE).|
|* Revenue deficit at 2.9% of GDP in FY24 as against 4.1% in FY23 (RE).|
|*The primary deficit is 2.3% of GDP in FY24 as against 3.0% (RE) in FY23.|
|* Capital expenditure raised to ₹10 trillion in FY24, compared to ₹7.28 trillion (RE) in FY23 – a rise of 37.4% over RE and 33.3% over BE.|
|* Interest payment at ₹10.8 trillion in FY24 – 41% of Revenue Receipts, 60.4% of GFD in FY23.|
|* GFD below 4.5% by FY26 is retained.|
Source: Budget Documents
The budget assumes nominal GDP growth at 10.5% in FY24, which may be slightly conservative. As real GDP growth in FY24 is postulated around 6.5%, the inflation number (GDP deflator, which is typically closer to WPI inflation in India) can be worked out as 4%. The recent softening of WPI inflation below 5% may be seasonal. The high base in FY23 may help reduce both WPI and CPI inflation a bit in FY24Q1, but the average inflation in FY24, both WPI and CPI, is unlikely to be 4% mainly because the core inflation remains sticky. With 6.5% real GDP growth, if average inflation turns out to be around 5%, which is most likely, the nominal GDP may grow at 11.5% in FY24. Given the revenue buoyancy during recent years, the revenue deficit may be contained even if revenue expenditures exceed the budget estimates and grow higher than 1.2%. Similarly, if disinvestment proceeds fall short of the budget estimates, the absolute fiscal deficit may go up but as a proportion to GDP, it may be around the budgeted level of 5.9%. A similar experience is visible between FY23BE and FY23RE. Even if this happens, the credibility of the government may not be at stake in adhering to fiscal consolidation.
The net market borrowing, including Treasury bills, at Rs.12.31 trillion in FY24 is marginally above Rs.11.96 trillion in FY23RE. The balance amount of the deficit will be financed predominantly by borrowing from small savings. Hence, there may not be undue pressure on the G-sec yield in FY24.
The government has no alternative but to go for fiscal consolidation. The interest liability of the government is at a historic high of Rs.10.8 trillion in FY24 – 41% of the total revenue receipts, due to accumulated debt. India’s general government debt-GDP ratio, which was around 90% in FY21, although moderated to about 84% in FY23, is not sustainable due to the low tax-GDP ratio. The government’s commitment to fiscal consolidation – below 4.5% of GDP by FY26 – is not only the best practice but also a compulsion failing which both the debt-GDP ratio and interest liability will be out of control in India. What matters is the quality of fiscal consolidation. Sincere efforts have gone into the FY24 budget exercise to reduce the debt-GDP ratio in the medium term.
III. Visionary Budget
Although it was the last full budget of the incumbent government, the honourable Finance Minister refrained from populist measures and presented a historic budget with three missions – sustainable growth, inclusive growth, and green growth. Although packaged under seven priority areas – inclusive growth; infrastructure and investment; unleashing the potential; green growth; strong financial sector; youth power; and reaching the last mile – they complement each other to achieve these missions.
III.1 Inclusive Growth
To reduce inequality, inclusive growth is a must. New initiatives for inclusive growth in the FY24 budget are given in Box 1. The objective of the government has been to involve people in economic activities – reskilling them to be self-sufficient, providing finance and new technology at their doorstep at a reasonable cost, and empowering them to earn their livelihood – rather than offer sops like direct benefit transfer, free rations/electricity/other appeasements, etc. The government also wanted to reach out to the marginalized section of society and unemployed youth through specific programmes (Box 2 and 3). These are special interventions by the government for the downtrodden and therefore part of inclusive growth.
Box 1. Inclusive Growth
- Digital Public Infrastructure for Agriculture.
- Agriculture Accelerator Fund – Agri-startups.
- Enhancing the productivity of cotton crop.
- Atmanirbhar Horticulture Clean Plant Program: Rs. 2,200 crore.
- Global Hub for Millets, ‘Shree Anna’: Indian Institute of Millet Research, Hyderabad.
- Agriculture Credit: Target increased to Rs. 20 lakh crore.
- Fisheries, PM Matsya Sampada Yojana: Rs. 6,000 crore.
- Cooperation: Multipurpose Primary Agricultural Cooperative Societies (PACS).
- Nursing Colleges: 157 new nursing colleges will be established.
- Sickle Cell Anaemia Elimination Mission: To eliminate Sickle Cell Anaemia by 2047.
- Medical Research: Collaborative research in select ICMR Labs.
- Pharma Innovation: Research and innovation in pharmaceuticals.
- Multidisciplinary courses for medical devices: Skilled manpower.
- Teachers’ Training: Upgradation of skills.
- National Digital Library for Children and Adolescents.
Box 2. Reaching the Last Mile
- Aspirational Districts and Blocks Programme.
- Pradhan Mantri Primitive Tribal Group (PVTG) Development Mission: Rs. 15,000 crore.
- Eklavya Model Residential Schools: Recruitment of 38,800 teachers and support staff, 740 Eklavya Model Residential Schools, serving 3.5 lakh tribal students.
- Water for Drought Prone Region: Rs. 5,300 crore.
- PM Awas Yojana: Rs. 79,000 crore.
- Bharat Shared Repository of Inscriptions (Bharat SHRI): A digital epigraphy museum with the digitization of one lakh ancient inscriptions.
- Support for poor prisoners.
Box 3. Empowering Youth
- Pradhan Mantri Kaushal Vikas Yojana 4.0: Coding, AI, robotics, mechatronics, IOT, 3D printing, drones, and soft skills, 30 Skill India International Centre to be established,
- National Apprenticeship Promotion Scheme: Stipend support to 47 lakh youth in three years, Direct Benefit Transfer under the Scheme will be rolled out.
- Tourism / Unity Mall at state capitals / Interest-free loan to states for 50 years etc.
III.2 Sustainable Growth
For sustainable growth, mainly three ingredients are required – good infrastructure, a supportive policy environment, and a robust financial sector, which can ensure a high level of investment that can sustain growth/increase productivity. Large capital expenditures on infrastructure (Box 4) proposed in the budget would not only have a multiplier effect on the economy, but also crowd in private investment, provide employment, and increase productivity. The impact of capital expenditure will be felt at least for the next 25 years or more. Measures under unleashing potential (Box 5) – essentially a part of sustainable growth – will also accelerate growth in the next 25 years through new technology, ease of doing business, capacity building, etc. The government has to play the role of a facilitator in these critical areas. Financial sector reforms in India have progressed well. It has to be robust and world-class which requires attention in new areas like digitization, data protection, cyber security, skilled manpower, and above all investor protection besides low-cost funds for the informal sector and savings opportunities for fixed-income earners (Box 6).
Box 4: Infrastructure and Investment
- Capital investment as the driver of growth and jobs: Rs. 10 trillion.
- Effective Capital Expenditure, Including Support to State Governments for Capital Investment: Rs. 13.7 trillion, 4.4% of GDP.
- Harmonized Master List of Infrastructure: Expert Committee to be setup.
- Railways: The heist-ever capital investment of Rs. 2.4 trillion.
- Logistics: 100 critical transport infrastructure, Rs. 75,000 crore, including Rs. 15,000 crore from private sources.
- Making Cities ready for Municipal Bonds: Interest-free loans to states extended for one year.
- Urban Infrastructure Development Fund: UIDF will be established through the use of priority sector lending shortfall, Budgetary support of Rs. 10,000 crore per annum.
- Urban Sanitation: 100% mechanical desludging of septic tanks and sewers, from manhole to machine-hole mode.
Box 5. Unleashing Potential
- Mission Karmayogi: Capacity-building plans for civil servants.
- Ease of Doing Business: Jan Vishwas Bill to amend 42 Central Acts.
- Centres of Excellence for Artificial Intelligence: Three centres of excellence for AI.
- National Data Governance Policy: Access to anonymized data.
- Simplification of Know Your Customer (KYC) process: Risk-based Digital KYC.
- One-stop solution for identity and address updating: DigiLocker service and Aadhaar as identity.
- Common Business Identifier: PAN will be used as the common identifier
- Unified Filing Process.
- Vivad se Vishwas I – Relief for MSMEs/ Vivad se Vishwas II – Settling Contractual Disputes
- E-Courts: Phase 3, Rs.7,000 crore.
- Fintech Services – DigiLocker Entity.
- 5G Services: 100 labs, including smart classrooms, precision farming, intelligent transport systems, and health care applications.
- Lab-Grown Diamond: A research and development grant will be provided to one of the IITs for five years for this.
Box 6: Robust Financial Sector
- Credit Guarantee for MSMEs: Rs. 9,000 crore – a revamped scheme from 1st April 2023, additional collateral-free guaranteed credit of Rs. 2 lakh crore. The cost of the credit will be reduced by about 1 per cent.
- National Financial Information Registry.
- Financial Sector Regulations: A comprehensive review of existing regulations.
- GIFT IFSC: Avoid dual regulation under SEZ Act.
- Data Embassy in GIFT IFSC.
- Capacity Building in Securities Market.
- Central Data Processing Centre.
- Reclaiming of shares and dividends: An integrated IT portal will be established.
- Digital Payments: Fiscal support will continue.
- Improving Governance and Investor Protection in Banking Sector.
- Mahila Samman Bachat Patra: For two years FD up to Rs 2 lakh at 7.5% interest.
- Senior Citizens Savings Scheme: Limit hiked from Rs. 15 lakh to Rs. 30 lakh and the limit of Post-office MIS is raised from Rs. 9 lakh to Rs. 15 lakh for a joint account.
III.3 Green Growth
India has committed to net zero emissions by 2070 with phase-wise intermediate targets of reducing carbon emissions. Notable initiatives in this direction are the green hydrogen mission, energy transition, electric vehicles, energy storage batteries, renewable energy evacuation, bio-fertilizers, etc., on which huge amounts of government investments are proposed (Box 7). These projects are capital-intensive and often time-consuming to go on stream. The next generation will benefit immensely from these programmes.
Box 7: Green Growth
- Green Hydrogen Mission: Rs. 19,700 crore.
- Energy Transition: Rs. 35,000 crore.
- Energy Storage Projects: Battery energy.
- Renewable Energy Evacuation: 13 GW of renewable energy from Ladakh, Rs. 20,700 crore.
- Green Credit Programme.
- PM-PRANAM: Alternative fertilizers and balanced use of chemical fertilizers.
- GOBARdhan Scheme: Rs. 10,000 crore.
- Bhartiya Prakritik Kheti Bio-Input Resource Centres: Natural Farming.
- MISHTI: Mangroves/Afforestation.
- Amrit Dharohar: Biodiversity in wetland.
- Coastal Shipping: To reduce carbon emission.
- Vehicle Replacement: Interest-free loan to states for 50 years for this.
IV. Impact of the Budget
The budget is growth positive, but non-inflationary. Budget proposals are designed not only to insulate the economy from global contagion but also to reinvigorate growth. Gradual fiscal consolidation may contribute to macroeconomic stability in the medium term. The real GDP growth of around 6.5% (6%-6.8%) in FY24 is feasible. India’s nominal GDP growth at 10.5% in FY24 seems conservative. If a 6.5% growth projection is realized, the nominal GGP growth may be at least 11.5% with average inflation of 5% in FY24. Capex-heavy fiscal consolidation has set the ball rolling for the virtual cycle to set in, which would crowd in private investment, accelerate growth and provide employment. Pressure on G-sec yield may be contained due to fiscal consolidation. As capacity utilization is approaching the long-period average, it is an opportune time for investors from India and abroad to go for fresh investments. Revenue foregone in the FY24 budget will boot consumption among taxpayers. Inclusive growth would help formalize the economy. Reskilling initiatives would provide a much-needed opportunity for unemployed youth to earn their livelihood. Green growth initiatives are innovative and forward-looking, which would improve the standard of living for generations.
*The writer is currently RBI Chair Professor at Utkal University and former Head of the Monetary Policy Department, RBI.
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