By Dipti Deshpande
Union Budget 2023: Faced with the onerous task of achieving fiscal consolidation amid an impending slowdown in domestic growth, policymakers have a difficult path to tread this budget. Global economic headwinds and the pressures typical in a pre-election year make it that much more challenging to strike a balance between budgetary measures and expectations.
The challenges are difficult to miss…
First, the centre has just two years beyond next fiscal to reach its fiscal deficit target of 4.5% of the gross domestic product (GDP), having brought it down to 6.9% in last fiscal and 6.4% (budgeted) in the current one, from a peak of 9.2% in fiscal 2021.
Sticking to the fiscal consolidation path will need lowering of expenses or accelerating revenue growth. Straying from it will make the target more difficult to achieve in the terminal years.
Second, while focusing on fiscal consolidation, the budget will also need to be growth-enhancing. With domestic growth slowing, and the private sector remaining cautious on investments, the government’s role in supporting capital expenditure (capex)-led growth will be crucial.
The government accounts for around 85% of the total infrastructure capex in the country. This mainly includes spending on roads, highways, railways, housing, and irrigation, which is not only asset-creating but also employment-generating.
Frontloading these spends in a year in which the first half is expected to be more adversely affected by global headwinds could provide some support.
Also Read | Union Budget 2023: How hiking basic exemption limit can benefit taxpayers
Third, while the government needs to continue spending on capex, its resources are constrained.
This year saw a windfall on account of higher nominal GDP growth, more broad-based growth across industry and services, and higher price levels (or inflation), which usually drive-up tax collections and improved tax compliance, especially on Goods and Services Tax.
However, some of these factors will be less supportive next fiscal as growth slows and inflation softens. So, revenue could be tighter.
Fourth, some fiscal headroom may be created by recalling tax sops and moderating subsidy spends, especially on food and fertilisers, to support the most-hit sections of the economy.
For instance, the inflation continues to ease sharply in coming months, it could allow the government to roll back excise duty cuts on fuel prices, or raise these duties, which could support the tax kitty.
Similarly, the next fiscal could see a reversal of or moderation in subsidy expenditures currently being incurred to the most-hit sections of the economy.
For instance, the Prime Minister’s Garib Kalyan Ann Yojana, introduced in April 2020 to ensure food security during the pandemic, was extended up to December 2022 as higher food prices pinched the poor. Rough estimates suggest the government spent around Rs 1.3-1.5 lakh crore on this programme each in fiscals 2022 and 2023. Under this scheme, the provision of wheat and rice in a year when inflation in these items was ~6% and 14%, respectively (April to November 2022), was timely. However, with prices cooling, the government could taper spending on this programme.
Also Read | Budget 2023 should focus on financial consolidation: Renu Kohli
Another possible area for a cut in expenditure next fiscal is the fertiliser subsidy as global fertiliser prices cool. Between fiscals 2021 and 2023, food and fertiliser subsidies have constituted close to 90% of the total subsidy payout. A moderation in some of these spends could release funds to spend on capex.
Lastly, private sector participation in investments should be encouraged.
There is some momentum in private sector investments, supported by deleveraged balance sheets, a sturdier financial system willing to lend, improving capacity utilisation in some sectors, the need to take up green investments, and push from the Production Linked Incentive scheme.
However, the pick-up remains slow, clouded by a very gradual recovery in consumption and continued global headwinds.
To be sure, the government has a large share in the country’s infrastructure capex, but its share in overall capex (infra plus industrial, as measured by gross fixed investment) is less than 30% of the. The private sector contributes 35% — down from its peak of 41% in fiscal 2016 — while households bring up the rest.
Hence, for an overall capex drive in the country to set in, the private sector will have to step up investment. While government capex will create complementarities and crowd in private capex, the process will be slow. A stronger push to, say the PLI scheme, to cover more segments, can augment the private sector’s efforts.
A combination of the above measures will be required to support growth next fiscal, while also ensuring inflation continues to moderate and eventually touches the 4% comfort rate. Meanwhile, continuing to press the pedal on reforms can ensure medium- to long-term growth prospects improve.
We expect GDP growth to slow to 7% this fiscal from 8.7% in the last as global slowdown hurts exports and the one-time lift in contact-based services fades. Higher interest rates will also bite into demand for some interest-rate-sensitive segments. Consequently, we expect GDP growth to slip next fiscal to 6%.
Also, consumer price inflation, reacting to global softening of prices and the recent cooling of domestic food prices, is expected to average 6.8% this fiscal and 5% in the next. From an external account perspective, current account deficit is expected to peak at 3.2% of the GDP this fiscal, and drop to 2.4% next fiscal, as slowing domestic growth keeps import demand low.
Next fiscal, therefore, will see a mixed bag on the macro front, and the budget will need to be drafted keeping all this in mind.
(The author is Principal Economist at CRISIL Limited. Views are personal)
Union Budget 2023: Faced with the onerous task of achieving fiscal consolidation amid an impending slowdown in domestic growth, policymakers have a difficult path to tread this budget. Global economic headwinds and the pressures typical in a pre-election year make it that much more challenging to strike a balance between budgetary measures and expectations.
The challenges are difficult to miss…
First, the centre has just two years beyond next fiscal to reach its fiscal deficit target of 4.5% of the gross domestic product (GDP), having brought it down to 6.9% in last fiscal and 6.4% (budgeted) in the current one, from a peak of 9.2% in fiscal 2021.
Sticking to the fiscal consolidation path will need lowering of expenses or accelerating revenue growth. Straying from it will make the target more difficult to achieve in the terminal years.
Second, while focusing on fiscal consolidation, the budget will also need to be growth-enhancing. With domestic growth slowing, and the private sector remaining cautious on investments, the government’s role in supporting capital expenditure (capex)-led growth will be crucial.
The government accounts for around 85% of the total infrastructure capex in the country. This mainly includes spending on roads, highways, railways, housing, and irrigation, which is not only asset-creating but also employment-generating.
Frontloading these spends in a year in which the first half is expected to be more adversely affected by global headwinds could provide some support.
Also Read | Union Budget 2023: How hiking basic exemption limit can benefit taxpayers
Third, while the government needs to continue spending on capex, its resources are constrained.
This year saw a windfall on account of higher nominal GDP growth, more broad-based growth across industry and services, and higher price levels (or inflation), which usually drive-up tax collections and improved tax compliance, especially on Goods and Services Tax.
However, some of these factors will be less supportive next fiscal as growth slows and inflation softens. So, revenue could be tighter.
Fourth, some fiscal headroom may be created by recalling tax sops and moderating subsidy spends, especially on food and fertilisers, to support the most-hit sections of the economy.
For instance, the inflation continues to ease sharply in coming months, it could allow the government to roll back excise duty cuts on fuel prices, or raise these duties, which could support the tax kitty.
Similarly, the next fiscal could see a reversal of or moderation in subsidy expenditures currently being incurred to the most-hit sections of the economy.
For instance, the Prime Minister’s Garib Kalyan Ann Yojana, introduced in April 2020 to ensure food security during the pandemic, was extended up to December 2022 as higher food prices pinched the poor. Rough estimates suggest the government spent around Rs 1.3-1.5 lakh crore on this programme each in fiscals 2022 and 2023. Under this scheme, the provision of wheat and rice in a year when inflation in these items was ~6% and 14%, respectively (April to November 2022), was timely. However, with prices cooling, the government could taper spending on this programme.
Also Read | Budget 2023 should focus on financial consolidation: Renu Kohli
Another possible area for a cut in expenditure next fiscal is the fertiliser subsidy as global fertiliser prices cool. Between fiscals 2021 and 2023, food and fertiliser subsidies have constituted close to 90% of the total subsidy payout. A moderation in some of these spends could release funds to spend on capex.
Lastly, private sector participation in investments should be encouraged.
There is some momentum in private sector investments, supported by deleveraged balance sheets, a sturdier financial system willing to lend, improving capacity utilisation in some sectors, the need to take up green investments, and push from the Production Linked Incentive scheme.
However, the pick-up remains slow, clouded by a very gradual recovery in consumption and continued global headwinds.
To be sure, the government has a large share in the country’s infrastructure capex, but its share in overall capex (infra plus industrial, as measured by gross fixed investment) is less than 30% of the. The private sector contributes 35% — down from its peak of 41% in fiscal 2016 — while households bring up the rest.
Hence, for an overall capex drive in the country to set in, the private sector will have to step up investment. While government capex will create complementarities and crowd in private capex, the process will be slow. A stronger push to, say the PLI scheme, to cover more segments, can augment the private sector’s efforts.
A combination of the above measures will be required to support growth next fiscal, while also ensuring inflation continues to moderate and eventually touches the 4% comfort rate. Meanwhile, continuing to press the pedal on reforms can ensure medium- to long-term growth prospects improve.
We expect GDP growth to slow to 7% this fiscal from 8.7% in the last as global slowdown hurts exports and the one-time lift in contact-based services fades. Higher interest rates will also bite into demand for some interest-rate-sensitive segments. Consequently, we expect GDP growth to slip next fiscal to 6%.
Also, consumer price inflation, reacting to global softening of prices and the recent cooling of domestic food prices, is expected to average 6.8% this fiscal and 5% in the next. From an external account perspective, current account deficit is expected to peak at 3.2% of the GDP this fiscal, and drop to 2.4% next fiscal, as slowing domestic growth keeps import demand low.
Next fiscal, therefore, will see a mixed bag on the macro front, and the budget will need to be drafted keeping all this in mind.
(The author is Principal Economist at CRISIL Limited. Views are personal)
