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.

Budget 23-24

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