Budget's Reset 2.0

Soon after Finance Minister Nirmala Sitharaman presented Union Budget FY2023 on February 1, commerce secretary B.V.R. Subrahmanyam was flooded with messages from exporters, their representative bodies and other stakeholders. They were gung-ho about export sectors, including labour intensive ones like gems and jewellery, garments, marine, electronics and engineering products. The tone of the messages was so positive that Subrahmanyam now considers the Budget as one of the most export-friendly ever. “There is nothing on our menu that we asked (finance ministry) for and didn’t get (in the Budget),” he says.

The other department under Ministry of Commerce and Industry – Department for Promotion of Industry and Internal Trade or DPIIT – is equally jubilant. The biggest Budget announcement, the PM GatiShakti National Master Plan to align roads, railways, airports, ports, waterways and logistics as engines for economic transformation, is about promoting industry, trade, manufacturing and services, in the process taking Indian economy on a high growth path by the time the country celebrates its 100th year of Independence 25 years from now. “A roadmap for new India; a transformative approach for economic growth and sustainability,” is how DPIIT Secretary Anurag Jain describes the Budget.

India Inc. agrees. “This statement of intent is clearly supported by a plan for the future, and backed by allocations – specifically in infrastructure, digital transition, planet resilience, education and health – to support Indian ambitions,” says Tata Sons chairman N. Chandrasekaran.

Budget FY2022 had started the economic reset towards the post-pandemic era. The FY2023 Budget takes that to the next level. Consider this. Allocations for health, agriculture and social sectors, which took precedence over everything else during the pandemic two years ago, have come back to more realistic levels. Some have seen a cut, others a marginal increase. A few, like Jal Jeevan Mission, continue to be in focus. On the other hand, the kitty set aside for capital expenditure has become far bigger. Infrastructure development and ease of doing business are priorities. Sunrise sectors have been identified and digital push — across sectors — is clearly visible.

Sitharaman retained her focus on targeted spending in order to get the economy up and running. That’s why the Budget belied hopes of many who expected tax sops, and surprised the ones who thought that government will return to more prudent fiscal spending after years of doing the heavy lifting through public investment and expenditure to compensate for the meek performance of private investment and consumption. It also dashed hopes of those who were looking for a push to demand by putting more money in hands of people just before some crucial state elections.

The messaging is clear. Covid-19 is passé. Growth is the new buzzword. And sops can wait.

Balancing Act

India’s stock markets rose 1.46% on Budget day. BSE Sensex, for instance, gave 848.4 points cheer to government’s focus on growth, evident in 35.4% increase in capital expenditure from ₹5.54 lakh crore in FY2022 to ₹7.50 lakh crore in FY2023. Centre is pushing public investment to crowd in private investment without levying more taxes. The budgeted expenditure is ₹39.44 lakh crore, 4.6% higher than FY2022 revised estimate. Similarly, revenue target is ₹22.83 lakh crore, an increase of 4.8% over FY2022’s revised estimate. Fiscal deficit target of 6.4% of GDP is lower than the FY2022 revised estimate of 6.9%.

The spending push will come from extra borrowings, an idea which has not gone well with bond markets, where yields rose on Budget day. “It’s a big-bang budget, but depends on where one stands on the bang perimeter. The massive ramp-up in capital spending and focus on infrastructure cements Budget’s credentials as a firmly growth-oriented one. Even as fiscal deficit has been reduced to 6.4% of GDP, government has announced significantly large market borrowings. The sharp rise in bond yields post Budget is a testament to the surprise for bond markets,” says Aurodeep Nandi, India economist and vice president at Nomura.

The steepest increase in outlay was seen in PM GatiShakti which, the finance minister said, is meant to “lay the foundation and give a blueprint to steer the economy over the Amrit Kaal of the next 25 years – from India at 75 to India at 100”. Together with allocation of ₹7.5 lakh crore (35% increase over previous year) and provision for creation of capital assets through grants-in-aid to states, government expects ‘effective capital expenditure’ of ₹10.68 lakh crore, about 4.1% of GDP. “The GatiShakti initiative is at the centre of Budget FY2023, highlighting the importance of quality multi-modal transport in achieving cost competitiveness. With global studies pegging India’s average logistics costs at 14% of GDP as against 8-9% for advanced economies, this is clearly a factor which needs to be addressed for attracting quality anchor investors across sectors,” says Arindam Guha, partner, leader, Government and Public Services, Deloitte India.

On the other hand, a major welfare measure with huge allocations during the pandemic – job guarantee scheme Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) - has seen a 25.5% cut in allocation to ₹73,000 crore from FY2022 revised estimate of ₹98,000 crore. There has also been a 27.1% reduction in allocation for subsidies, including food, fertiliser and petroleum as compared to revised estimates for FY2022. The PM-KISAN income support scheme for farmers saw a 0.7% increase to ₹68,000 crore over the FY2022 revised estimate of ₹67,500 crore. All India Agriculture Workers Union (AIAWU) says 20% MGNREGS outlay will go into clearing previous year shortfalls and the allocation falls short of nearly ₹2 lakh crore that were needed if the programme had to be implemented at the same level as the current year. “Its disastrous effects (lower allocation for MGNREGS) were seen last October when the programme had to be discontinued in many states,” says A. Vijayaraghavan, president, AIAWU. To be fair to the government, officials have clarified in post-Budget interactions that social welfare allocations can be increased if situation warrants. This provides relief in view of concerns over newer Covid-19 variants.

Some of these cuts also result from the government’s decision to be conservative in estimating revenue. Estimated gross tax receipts of ₹27.57 lakh crore are just 9.6% more than FY2022’s revised estimate of ₹25.16 lakh. Excise duty collections are estimated at ₹3.35 lakh crore, less than FY2022’s revised estimate of ₹3.94 lakh crore. Disinvestment receipts are projected at ₹65,000 crore as against FY2022’s revised estimate of ₹78,000 crore (Budget estimate was ₹1.75 lakh crore). While disinvestment numbers might have become realistic, there are high chances of government garnering more tax than it has budgeted for. “The nominal GDP for FY23 is estimated at ₹258 lakh crore, 11.1% growth over FY2022. Assuming conservative real GDP growth rate of 8% (Economic Survey has projected 8-8.5% real GDP growth), this translates into inflation of around 3%. If growth comes back riding on the spending prowess, nominal GDP projection will clearly prove to be an underestimate. This may provide additional spending room,” says Soumya Kanti Ghosh, group chief economic advisor, State Bank of India.

Digital Play

Irrespective of actual allocations, digital technology pervades every aspect of the Budget. One such initiative is introduction of digital rupee (central bank digital currency). “The proposal to introduce digital currency using blockchain technology will give an impetus to the digital banking sector. The finance minister laid to rest the conundrum around taxation of virtual digital assets by introducing a 30% tax on income from transfer of such assets,” says Himanshu Parekh, partner, tax, KPMG in India.

In health, the Budget talks about rolling out the National Digital Health Ecosystem. Dr. Azad Moopen, chairman and managing director, Aster DM Healthcare, says “digital registries of health providers and health facilities, unique health identity and universal access to health facilities under the National Digital Health Mission are positive steps towards enabling access to healthcare for the wider population.” He also appreciated the move for launch of Tele-Mental Health Programme at the national level but added that healthcare players had anticipated higher allocation for the health sector. “Coming out of the shadows of the pandemic, it is important to allocate at least 3% of the Budget to healthcare,” says Moopen.

Agriculture and rural sector will also benefit from moves towards digitalisation such as digital land record management, launch of Digital Ecosystem for Skilling and Livelihood (DESH-Stack e-portal) and kisan drones. “The focus on agritech, drones and digital technology is a sign that government seeks to accelerate use of modern technology to transform the agri sector,” says Pravesh Sharma, director, Samunnati Agro.

While micro, small and medium enterprises will benefit from digital linkage of Udyam, e-Shram, NCS and ASEEM portals, the banking sector will get 75 new digital banking units during the year. A digital university will give education a technological edge. Even the PM GatiShakti Project will have unified logistics interface platform, designed for application programming interface, for seamless multimodal movement of goods and people. “Government has continued its digitalisation efforts with focus on 5G auctions. A new scheme has been proposed for making design-led manufacturing for 5G ecosystem a part of the PLI scheme. The 1.5 lakh post offices will be brought under the core banking system. The launch of digital rupee using blockchain technology will enable speedier commerce. Overall, it is a Budget for promoting the country’s aspirations of growing digitally,” says Sanjeev Agarwal, chief executive officer, Protiviti Member Firm for India. Protiviti is a group of independent consulting firms helping companies solve problems in finance, technology, operations, governance, risk and internal audit.

The Concerns

Former finance minister and leader of Indian National Congress P. Chidambaram says government’s plan to finance the fiscal deficit through record market borrowings (₹14.9 lakh crore gross borrowings) and lesser allocation for welfare programmes are a matter of concern. “70% fiscal deficit in FY2023 will be financed by market borrowing as against 55% in the current year, crowding out private sector borrowing. The worry from the welfare angle is greater. Every key subsidy, petroleum, fertiliser, food, has been slashed. Outlay for agriculture and allied activities, which was 4.3% of GDP in FY2022, is only 3.84% in FY2023. Allocations for crop insurance and MGNREGS have been slashed. The total subsidy bill has been cut by a humongous 27%. This is the unkindest cut in the Budget,” he says. Chidambaram also questions the decision to bet heavy on market borrowings and increase in corporate tax, personal income tax and GST collections. “There is not a word about raising more resources from the rich, especially the very, very rich 142 persons whose wealth in the last two years has increased from ₹23,14,000 crore to ₹53,16,000 crore,” he says. It’s not only the opposition party that has complaints. RSS affiliate Swadeshi Jagran Manch (SJM) has raised concerns, though the organisation has welcomed most initiatives. SJM says the Budget makes limited efforts for promoting small industry and job creation.

“We understand that there is an urgent need to promote self-employment for which central as well as state governments need to push entrepreneurship development programmes and infuse more funds and seed capital for small businesses. There is a need for an Entrepreneurship Development Centre in each district. We welcome the scheme for enhanced lending to the MSME sector by extending the guarantee cover for such loans. However, we feel that government support by way of equity subsidy is urgently required,” says Ashwani Mahajan, national co-convenor, SJM. The organisation has also strongly opposed the move to allow crypto currencies. “We firmly believe that looking at the dangers of national security, the menace of money laundering and other related dangers emanating from transactions in cryptos, ban on private crypto currencies is the only solution”, says Mahajan.

While the debate on cryptos continues, government keeps marching on its supply-side economics to get India on a faster growth path.