The Union Budget 2023-24 is being presented at a time when India is considered a beacon of hope amid a turbulent global economy. The 7 per cent expansion in the gross domestic product (GDP) estimated in FY’23, as per the first Advance Estimates, synchronizes well with market expectations, and upholds the International Monetary Fund (IMF) projection of India continuing to retain its position as the fastest-growing major economy in an unsettled global landscape.
Nevertheless, even as the Indian economy is expected to perform well, the headwinds caused by external factors are likely to constrain the economy and would need monitoring.
In the run-up to the Budget presentation, there are therefore hopes and expectations that the finance minister would seek to strike the right notes on policies that would stimulate investment, boost domestic demand, and drive-up growth.
Expectations from the Budget
First, it is expected that the government would continue with public spending, especially on infrastructure, which would pump prime the economy and crowd in private investment. The finance minister has given an indication that the government would continue to boost capital spending. The Confederation of Indian Industry (CII) suggests that the Budget should increase allocation to capital expenditure by 35 per cent, like last year, taking the total public capex to about Rs 10 lakh crores. States should also be encouraged to undertake capex by continuing to provide interest-free loans which are performance-driven.
Second, Consumption demand, which comprises around 60 per cent of GDP, is critical to power growth in the economy. For this, the Budget should consider rationalising personal income tax slabs and rates, especially at lower income slabs to boost the purchasing power of the middle class.
The impetus should be given to rural demand. The rural heartland, which is the key driver of domestic demand, has not quite recovered its spending power post-pandemic and needs attention. Rural demand should be supported by high spending on rural infrastructure such as cold storage, warehousing, roads, irrigation, etc. Besides, rural purchasing power should be enhanced through higher outlays on MNREGA, health insurance, encouraging farm-to-market connections through technology and IT, and better-targeted subsidies which would put more money in the hands of the farmer.
Third, manufacturing growth is pivotal for sustaining the India growth story and meeting the employment imperatives. The shift in global supply chains has made it possible for India to become a potential manufacturing hub. India should seize the advantage. Concrete steps should be taken to improve the ease of doing business, making labour markets flexible and reducing power tariffs would greatly help. Focus on skilling and education would provide a backbone to enhance employability and sustain the manufacturing trajectory in the medium term.
Some of the other interventions such as extending the deadline for lower corporate tax for new manufacturing units by a year (Section 15BAB of the Income Tax Act); extending RoDTEP to all export products, including EoU and SEZ, expanding the PLI scheme to labour-intensive sectors such as toys, apparel, footwear, etc would also boost both manufacturing, exports, and jobs.
Fourth, the government should focus on MSMEs, which are the pillars of the economy, in terms of their contribution to growth and employment. Availability of adequate finance at competitive rates has been a persistent challenge for the MSME sector, as banks consider them higher risk entities. As a remedy, it is suggested that the target for formal credit from banks to this sector should be enhanced to 10 per cent of the overall bank credit from the present level of 6 per cent.
Further, the revival of the Credit Linked Capital Subsidy Scheme (CLCSS) for technology up-gradation, extending the ECLGS Emergency Credit Line Guarantee Scheme by another two years, linking of TReDs to GSTN and creation of a fund for encouraging the adoption of green technology are other initiatives which should be considered to rejuvenate MSMEs.
Fifth, the capital gains tax structure needs to be reworked with respect to its rates and holding period across all asset classes-equity, debt, and immovable property to simplify the existing capital gains framework for investors. Complexities and inconsistencies in the current capital gains tax structure should be removed.
Countries like the UK, Canada, Denmark, Philippines, Indonesia, etc. do not distinguish between asset classes or holding period specifications in capital gains taxation. This is something that India should emulate to boost the investment climate.
Lastly, the spending priorities of the government should not come in the way of fiscal consolidation. The Budget should adhere to the fiscal deficit target of 6.4 per cent of GDP for this fiscal, reducing it to 6 per cent in FY’24 and to 4.5 per cent by FY’26. Any increase in public spending should be compensated by additional revenue mobilisation initiatives such as accelerating disinvestment along with a commensurate rationalization of non-merit subsidies.
The article was first published in the First Post, 31 January 2023.