Budget 2023: Budget's Message Should Be About Sustaining Growth Recovery

THE UNION BUDGET is a statement of the Central government's annual receipts and expenditure. A lot of media attention focuses on the Union Budget, with little attention paid to State Budgets, which are no less important. However, since 1991, Union Budgets have assumed an additional significance, since they are an opportunity to convey the government's message, signalling what the government intends to do. For three reasons, this assumes additional significance this year. First, there is global uncertainty and turmoil. India is neither unaffected, nor insulated from the volatility. But unlike many other countries, India is not excessively export-dependent and has endogenous sources of growth, too. Against this background, the Budget (and the speech) must convey the sense of certainty and continuity of government policies. There has been continuity across the two terms of the Modi government, since May 2014, and there is no evidence that there was anything wrong with those policies. Indeed, but for the focus on providing basic necessities and Digital India, the country would have fared worse under Covid. Second, the economy has recovered well, and fairly robustly, from Covid and its consequences, including the lockdown. Uncertainty tends to delay discretionary consumption expenditure (as do expectations about inflation) and even private investments. Therefore, a message is needed about sustaining the growth recovery. Third, this is the last proper Budget before the country heads towards general elections. Perhaps one should mention a relatively extraneous factor, too. This is the year when India has assumed the G20 Presidency. A lot of attention will focus on India and its policies.

In the first resort, the Union Budget is about numbers and balancing them. Thus, any Budget-making exercise begins with an assumption about nominal growth. For instance, for 2022-23, the Budget assumed 11.1% nominal rate of growth, divided into two components of real growth and inflation. What is real growth going to be in 2022-23? The consensus seems to be between 6.8% and 7%. That's what the chief economic adviser has said and there is no reason to differ with this view. But that's been driven by a Q1 growth of 13.5%, courtesy the low base. Q2 growth dipped to a more likely 6.3%. In other words, one shouldn't assume real growth of 7% in 2023-24. It is bound to be lower. Part of the problem lies with CSO's calendar of GDP estimates. At the time of formulating the Budget, there are first advance estimates and second advance estimates are available only after February (For reporting national income, is there a call to shift from the fiscal year to the calendar year? That will certainly make Budget-making easier.)

To return to real GDP growth in 2023-24, one should be conservative and pitch for something like 6% and no more. In a world clouded with uncertainty, it is best to be conservative and be proved wrong, rather than be excessively optimistic and be proved wrong. A Budget states, by deduction, the nominal rate of growth. It doesn't break it up into the two components of real growth and inflation. Inflation is still above the comfort zone and is not that amenable to monetary policy instruments. However, both food inflation and imported inflation are not as high as they were. There is a higher base and commodity prices have eased (For purposes of the Budget, what matters is the GDP deflator, a weighted average of CPI and WPI). It would be unreasonable to expect inflation at more than 5.5%. Therefore, I think the Budget will assume a nominal GDP growth rate of 11.5% or thereabouts. Anything more will be unwise.

From this, one moves to estimates of tax revenue. So far, gross tax collections have done exceedingly well in 2022-23, exceeding Budget estimates. This is true not just of GST, but direct taxes as well. There is no reason why these robust trends should not continue in 2023-24. All too often, historically, citizens and businesses have looked at the Budget with the lens of reducing taxes. The Budget must stimulate consumption by reducing taxes and private investments by granting more tax exemptions. So runs the argument. There are two problems with it. First, there are multiplier benefits associated with reducing taxes, increasing government revenue expenditure, and increasing government capital expenditure. Resources have opportunity costs. Multiplier benefits of government expenditure are greater than those of reducing taxes and multiplier benefits of capital expenditure are greater than those of revenue expenditure. So why should one do something that is illogical? Indeed, unlike some other countries, India is better poised precisely because, post-Covid, it increased capital expenditure and not revenue expenditure (barring free food). Second, any specific tax exemptions to individuals or sectors are discretionary and distort resource allocation.

We need to recognise that we are heading towards a tax regime with certainty and continuity, where tax rates and slabs won't change from year to year. This doesn't mean we have reached the goal. But we shouldn't deviate from the goal either. Taxes mean direct taxes and indirect taxes. All products are not part of GST and GST has too many rates. The average GST rate is also far short of the revenue neutral rate. But GST changes occur through the GST Council. They cannot be done through the Budget. This leaves direct taxes, divided into personal income tax and corporate tax. This is an unnecessary silo and one should remember unincorporated enterprises also pay taxes at the personal income tax rate. There cannot be any dispute that the eventual goal is one without exemptions, with a simplified tax structure, where compliance costs and tax disputes are lower (This will also curb tax avoidance). But the transition cannot occur overnight and what is envisioned is an alternative exemption-less path, for both personal income tax and corporate tax. I have both options, an exemption-ridden one and an exemption-less one. But, in neither case, have there been too many takers for the exemption-less world. I hope the Budget takes a look at tax rates for the exemption-less world, so that there is greater incentive for the transition. What kind of tax revenue growth the Budget will envisage is impossible for an outsider to predict, since that is a function of changes that will be introduced. Given that real growth of 11.5% or thereabouts, I am inclined to think a tax revenue growth of around 15%.

This government hasn't deviated from the overall goal of fiscal rectitude and there is an announced goal of reducing the fiscal deficit/GDP ratio to 4.5% in 2025-26. The target for the 2022-23 Budget was 6.4%. There is a tendency to make a fetish about fiscal deficit numbers. The key number to track is debt figures. Having said that, to achieve that target of 4.5% in 2025-26, the 2023-24 Budget will need to target a fiscal deficit/GDP ratio of 5.8%. This is a ratio and depends on both the numerator and the denominator. The denominator has nominal GDP and if GDP growth and inflation are both high, it makes the task easier. On the numerator, many items of revenue expenditure are exogenous in the short-turn, even subsidies, some of which have legislative backing.

Once there is revenue expenditure, like free food, it is also difficult to scale it down. Economists speak of counter-cyclical measures, but the cycle has to work both ways. When growth recovers, the counter-cyclical part of expenditure must be reduced. There was inefficient expenditure through Centrally sponsored schemes, but several of those have been rationalised and pruned. Therefore, the challenge is one of achieving fiscal consolidation, while not compressing capital expenditure. It is one of not relying too much on government borrowing and tapping non-tax revenue. These are the nuts and bolts of the Budget-making exercise.

Reforms occur throughout the year, not on Budget day alone. There is a logic to the reforms the government has pursued since 2014, and Covid and its aftermath, or the current global tensions, have not suggested there was anything wrong with those reforms. On the contrary, the evidence is otherwise. But it is not always very obvious how all these different ingredients of the reform package fit together in the government's vision. Beyond the nuts and bolts, that is what the Budget speech does. It lays out the government's thought process, the template, not only for 2023-24, but also for the medium-term, indeed for the next 25 years of Amrit Kaal. Hence, many people react not to the nuts and bolts, but to the speech. It is a major vehicle for messaging.