Budget 2023 pulls off an artful balance

Source: The post is based on an article “Budget 2023 pulls off an artful balance” published in The Indian Express on 2^nd February 2023.

Syllabus: GS 3 – Indian Economy

Relevance: Budget 2023-24

News: The article discusses the concerns that the domestic economy was facing and the way this year’s budget addresses those.

What are the domestic economic concerns and how does the budget address those?

Capital expenditure and infrastructure creation: There were global uncertainties, lower consumption rates, slow exports, and tight monetary conditions.

Total public sector borrowing in 2022-23 was upwards to 9 percent of GDP and the current account deficit was widening. So, a budget was needed to push on public investment and reduce the deficit.

Therefore, this year’s budget has taken steps towards ensuring capital expenditure and infrastructure creation. A big public investment push was the need of the hour to increase growth and job creation.

Moreover, the central capex has jumped from 1.7 percent of GDP to 2.7 per cent due to the previous budgets. However, this year’s budget is more ambitious and has targeted central capex at 3.3 percent of GDP next year.

If achieved, this would constitute a doubling of capex in just four years and would help in job creation, crowding-in private investment, improving economic competitiveness and boosting growth.

Subsidies: Subsidies were higher due to the pandemic and the Ukraine war. Revenue expenditure used to be 4.5 times the capex allocation in 2019-20.

However, this year, the ratio is expected to fall to about 2.5, if the budgeted projections become productive and will fall further to two in the next year.

Fiscal consolidation: The budget has focused on consolidating 0.5 percent of GDP next year. The budget speech has re-affirmed the central fiscal deficit will be brought below 4.5 per cent of GDP by FY26. This means at least 1.5 percent of GDP consolidation will be brought over the next two years. This was needed due to the higher fiscal deficit faced by the centre.

Hence, the budget has focused on all the right aspects such as improving the quality of spending, staying on a consolidation path, re-affirming medium-term fiscal targets.

However, there are still challenges present.

What are the challenges and what can be the course of action?

Tax Buoyancy: Tax buoyancy is strong this year because of increasing growth and higher inflation. However, growth and inflation are expected to slow which could lower the tax buoyancy in the next year.

Furthermore, to achieve this year’s target, gross taxes would need to grow upwards from 9 percent in the last quarter to 16 percent in the January-March quarter.

If this year’s targets are not achieved, it would further increase the target of tax buoyancy required for the next year.

Therefore, policymakers will need to closely monitor, so that contingency revenue plans are made in case nominal GDP or tax buoyancy don’t fructify, so the capex is protected.

Absorptive capacity of states and PSU’s: There is a need to focus to improve the absorptive capacity of states and PSU’s because they have been lagging on capex in recent years.

Mobilising revenues: It is necessary to double down on revenue mobilisation in the coming years. Lower food and fertiliser subsidies in FY24 created 0.8 percent of GDP in fiscal space that was used to reduce the deficit and boost capex.

Therefore, the focus must be on mobilising revenues (both direct and indirect taxes) and increasing asset sales, if the deficit is to be brought down by 1.5 percent of GDP in the next two years without compromising capex.