The Union Budget 2023-24 should embody a focused endeavor to rejuvenate the Keynesian “animal spirit,” fostering economic dynamism and growth.
MUMBAI : Domestically, the backdrop is that of an impending general election, and, traditionally, an incumbent government cannot present a full Union budget in such a year. Whereas, globally, the setting is that of a debate on debt and sustainability amid falling growth. But that shouldn’t necessarily be the context for the upcoming budget. A myopic focus a la the developed economies or the rest of the world on just debt reduction could prove to be costly in the long term as the India story literally has miles to go. Likewise, an interim budget presented by the government before the general elections should not constrain its ambition to do what is right for an economy that is poised at a critical juncture.
Nurturing Growth and Fiscal Targets
The government must focus on nurturing and furthering India’s human and physical capital, and invest in areas that can enhance its potential growth and usher it towards the goals of India’s Amrit Kaal. The budget must provide a blueprint for steering the economy towards a sustained high-growth trajectory in a growth-starved world. This will ensure that our debt-to-gross domestic product (GDP) ratio will decline once the economy is on a higher growth path. Note, the global economy is forecast to slow even more in 2024 to approximately 2.6%. Moreover, the expectation is that conditions will weaken over the year ahead due to high interest rates, geopolitical tensions and a slowdown in the world’s top economies.
Key Focus Areas for the Interim Budget
Adherence to fiscal targets and fiscal consolidation road map: The targeted fiscal deficit for 2023-24 is 5.9%, which is a 50-basis-point reduction from 2022-23 levels. Adhering to these targets will reassure sovereign rating agencies and investors. It will also keep a lid on yields and borrowing costs that have been rising the world over.
Furthermore, it is important to re-emphasize a medium-term fiscal consolidation road map with a clear elucidation of the fiscal journey ahead. The finance minister has in the past reaffirmed the desire to bring fiscal deficit under 4.5% by 2025-26. However, an important question that follows is—should such consolidation be at the cost of spending? India’s fiscal consolidation has, more often than not, been on the back of expenditure cuts. The budget must reflect a concerted effort to reinvigorate the Keynesian “animal spirit” and enhance long-term growth potential.
Enhancing Government Spending: Driving Growth and Economic Competitiveness
The quantum of government spending has reached a significant size, with the overall budgeted expenditure for 2023-24 standing at ₹45 trillion, equivalent to India’s real GDP in 2002. Therefore, the efficiency and effectiveness of public spending are imperative. The capital budget and framework must align to meet national development needs in a cost-effective manner while striving to structurally raise revenues. Emphasizing spending, particularly on capital outlay, is equally vital alongside fiscal consolidation through increased revenues.
Maintain the Investment Tempo
Reiterating the imperative for boosting capital expenditure and intensifying such spending would convey a pivotal, positive signal, driving down logistics costs, enhancing global competitiveness, and stimulating exports. The government’s commendable escalation of capex from 1.7% in 2019-20 to 3.3% in 2023-24, the highest since 2007-08, has positively impacted the economy and job market through the capital goods and infrastructure sector.
Driving Growth and Economic Competitiveness
Sustaining and enhancing the momentum in capital spending by raising it by at least 25% to ₹12.5 trillion in 2024-25 could reinforce these signals and encourage private capex, which has been trailing. Continuous robust defense capital expenditure is crucial, given the volatile geopolitical climate in India’s surroundings. With Indian manufacturing witnessing a multi-year revival, advocating for the expansion of the infrastructure sector to encompass various aspects of the green hydrogen/ammonia ecosystem is essential in the face of global environmental concerns. Furthermore, prioritizing ease of doing business and streamlining efforts to reduce regulatory and compliance burdens on taxpayers and stakeholders, while fostering the growth of micro, small, and medium enterprises, should remain a top focus.
Government Budget and Global Bond Indices: Ensuring Credibility and Stability
The government’s budget must maintain a non-negative stance without disrupting the system, especially as the entry into global bond indices has heightened attention on government finances and fiscal accountability. The fiscal calculations and assumptions must hold credibility to instill confidence in investors and stakeholders, thereby ensuring a stable economic environment.
Mitigating Risks and Costs
Amidst the current global macroeconomic backdrop, the volatility of foreign funds used for domestic funding poses significant risks and costs. Past instances during the global financial crisis and taper tantrum episodes have highlighted the susceptibility of depending on foreign funds to meet domestic needs. It is crucial to mitigate such risks and secure stable funding sources.
