Modi Govt to face macro test in its last full budget before 2024 elections

Not even a single rupee can be spent by the government without the consent of the people. Hence the requirement that a budget proposal is tabled as the Finance Bill in Parliament and be passed. As the Bharatiya Janata Party (BJP) has a majority, there is no problem in getting it passed in the Lok Sabha and the Finance Bill does not need the approval of the Rajya Sabha, though the members are free to comment and critique it. So, technically, whatever Union Finance Minister Nirmala Sitharaman presents today will be passed, as no BJP member will vote against it.

However, that’s now how it works. Each member must face his or her constituency and, clearly, there has to be something to please all the voters. Besides, this is the last full budget before the national elections next year. So, there will be a tendency to be populist and extravagant.

The Finance Minister must also take into account the broader context of three macro issues. The first is that the world is going into a recession this year. So, India cannot remain immune to recessionary winds, in terms of lower capital inflows, fewer prospects for exports, and remittance earnings. We have seen massive layoffs from the tech sector in America and an estimated 80,000 Indians have lost jobs and might have to head home unless they find a new job in the next 60 days.

The second macro context is the continuing K-shaped recovery, which is now in its third year. This just means that consumer spending is booming at the upper end, while the bulk of the population, the lower part of the K, is struggling with unemployment, inflation, and stagnant consumer spending. This is illustrated by the fact that Mercedes sales had a record growth of 41 percent in 2022 in India, but the two-wheeler aggregate sales fell for three years in a row and marginally improved in 2022.

Airline travel is booming and so is India’s stock market, having clocked a 5 percent growth last year, despite a steep fall in American stocks. However, this good fortune benefits only those at the top end of the income spectrum. We don’t need an Oxfam report to confirm that inequality is worsening, both for income and wealth.

The third macro context is the fiscal tight corner. India is spending nearly 40 percent of its tax revenues on paying interest on the debt. The debt mountain has reached 90 percent of the gross domestic product (GDP) and every year’s deficit makes the mountain grow and increases the interest burden. So, there is no room to expand the deficit. Either revenue has to go up, which means more taxes or non-tax revenue by selling government stake, or expenditure has to be curtailed.

Against these three macro contexts, what can we expect?
To make India more resilient against global recessionary winds, we might see export incentives as well as incentives to attract foreign money, from NRIs as well as others. We might see some lowering of tariff barriers, which benefit exporters who have a high import component. To tackle the K-shaped recovery we will see a small hike in the PM KISAN cash scheme for farm households. We might see a higher allocation for NREGA.

There might be a slight relaxation in income tax slabs as inflation has eaten away 20 percent of purchasing power in past three years. However, keep in mind that barely 2 crores Indians actually pay more than zero income tax. Indirect taxes like GST are outside the ambit of the budget.

For fiscal consolidation, we could see some hike in long-term capital gains tax, to bring some parity between different asset classes such as stocks, bonds, private equity, and real estate. Expansion in the military budget is probably going to be less than 10 percent, though we need more money for modernization. The bottom line is that the propensity is likely to be more toward fiscal consolidation and providing some relief to the lower-income segment as well as income taxpayers.