Budget FY 2023: a bird’s eye view

It was a short budget speech by Nirmala Sitharaman, the Finance Minister. Either she wanted to keep her cards close to her chest (even the Defence Budget Allocations were not given out) or she wants to cede no opportunities for her political detractors to hit out.

Nevertheless, what can be discerned clearly is that it is a growth-oriented budget with thankfully hardly any populist measures in an election heavy environment.

The Macros

The Economic Survey had earlier pegged the FY 22 GDP growth at 9.2% and FY 23 forecast at 8-8.5 %. With the real GDP having already crossed the pre-pandemic levels, the projections for FY 23 point to a robust economic recovery and a welcome return to the 8% GDP growth trajectory. In this growth scenario, the two most important parameters in the budget are the Fiscal Deficit and the Govt Capex. The Fiscal Deficit for FY 22 is pegged at 6.9% of GDP (budget estimate was 6.8%) and for FY 2023, it is forecast at 6.4% of GDP. What it implies is that the pre-Covid emphasis on fiscal responsibility has been dispensed with and there appears to be no hurry to return to the fiscal deficit target of 3%. With more money now available, the Govt has planned a significant upgrade to its Capex from 5.54 Lakh Cr in FY22 to Rs 7.5 Lakh Cr, an increase of 35%. The FM indicated that public investment has to lead while private investment is supported and picks up.

Infrastructure

As part of this public investment gambit, 25000 Kms expansion of Highways with Gati Shakti Master Plan for expressways, 2000 Kms to be brought under Kavach in the financial year, four multi-modal national parks contracts in FY 23, housing projects under PM Awaas Yojana worth Rs 48000 Cr, Rs 60000 Cr for tap water for 3.8 Cr households, Rs 19500 cr earmarked for the manufacture of solar modules, 400 new Vande Bharat trains and 100 new Cargo terminals(over 3 years) are planned.

Inflation          

The Budget speech was totally silent on this all-important issue. A corollary of high fiscal deficit is usually Inflation.  This is already a matter of concern with WPI touching 14% last month while CPI surprisingly way behind, though within RBI’s comfort level of 4% plus-minus 2%. As growth picks up will retail inflation catch up with Producer inflation? Though the world over, Govts are happily spending in the belief that high fiscal deficits don’t lead to high inflation, India has to contend with imported inflation, with oil hovering around 90 $ a barrel and predicted to touch 100 $ due to international supply-side constraints. Govts in India have been traditionally touchy about inflation, but this Govt has decided to take it in its stride while perhaps hoping for much lower oil prices as the year progresses.

Jobs

The next big issue is Unemployment and Rural Distress. A significant portion of the labour force is still unemployed in these Covid times. One indicator is the real rural wage growth which has slowed down considerably. Together, it has led to weak consumer demand which is still lower than pre-pandemic levels. During the budget speech, the FM announced that 6 million new jobs will be created as part of the Make in India scheme. The ECLGS scheme is extended till March 2023 and cover expanded to Rs 5 lakh cr.  It was evident from the proposals that jobs are also expected to be created as part of Govt Capex, outlined above as well as private Capex; total effective Capex seen at Rs 10.7 Cr in FY23. For Capital Procurement in Defence, 68% is expected to be met from domestic manufacturing (up from 58% last year). Then there is a Production Linked Incentive scheme for manufacture of high-efficiency solar modules to give a fillip to the target of 280 GW of solar capacity by the year 2030. Digital ecosystem for upskilling and livelihood is to be launched along with API based skill credentials, payment layers for relevant jobs and opportunities. However, the budget speech neither covered MNREGA nor any separate blueprint for employment generation in urban areas.

Agriculture                   

For Agriculture, the FM spelt out the Farm Procurement Value, pegged at Rs 2.37 Lakh Cr for FY 23. The use of drones to support agriculture was indicated while announcing the revival of the concept of Agricultural University. Railways are to develop projects for farms in addition to MSMEs.  However, the stated proposals were silent on Food and Fertiliser subsidy.

Industry

As far as Industry and Exports are concerned, the FM reiterated the concept of Atma Nirbhar Bharat and the need to reduce imports. Incentives for startups are extended till March 2023 and SEZs are going to be revamped. Data Centres and Energy storage will be given infrastructure status. There will be a 5G Spectrum auction in FY 2023 and Optical Fibre will be laid in villages using the PPP model. Necessary amendments in IBC are to be carried out. Private Industry will also be encouraged to collaborate with DRDO. An announcement was also made on the introduction of Sovereign Green Bonds while no details were given. The FM announced that LIC divestment will take place shortly but the Divestment target for FY 23 has been kept at Rs 65000 Crore which is rather disappointing. While the exports have been rising smartly over the last few months, no targets for the ensuing FY were given out. An announcement on the introduction of Digital Currency to be issued by RBI, using BlockChain technology, was also made.

Taxation

On the Taxation front, the FM while making no major changes, emphasized the need for a stable and predictable Direct Tax regime.  The GST collections are buoyantly reaching an all-time high of Rs 1.41 lakh cr. The markets heaved a sigh of relief with the status quo being maintained on LTCG. To ensure a level playing field, MAT for Cooperatives is reduced to 15% (18.5 earlier) with a surcharge reduced to 7% (12% earlier) for revenue from Rs 1 cr to 10 cr. The Corporate Tax Target was pegged at Rs 7.2 Lakh cr (up from Rs 3.65 Lakh cr). Income from the transfer of digital assets will be taxed at 30%. For State Govt employees, Tax Deduction limit for an employer’s contribution to NPS increased to 14%.

Customs

In the end, talking on Customs reforms, the FM again stressed on the level playing field for domestic SMEs and to ensure the same, announced some reduction in duties for Electronics, Gems and Jewellery (unpolished diamonds), Chemicals (Methanol, Acetic acid etc) and MSMEs (duty on Umbrellas hiked to 20%) She also announced additional duty of Rs 2/litre for unblended fuels from October 2022.

The Missing Links

The FM was clearly economical with her words today and the Finance Bill will have to be scrutinised for details. Even the outlays on Defence, Health and Education were not spelt out. There was no indication on how the rising public debt, which has already reached 90% of GDP, will be tackled. The Foreign Exchange imbroglio; although the reserves appear a healthy 600 bn $, with outgo of 256 bn $ slated in next 12 months (almost 40% of reserves), how will this be tackled and what impact it will have on currency? Does the RBI have a range or comfort level for the $ -Rs equation? Clearly, the Budget conceals more than it reveals. While betting on growth, Nirmala Sitharaman has apparently chosen to keep the budget as just a revenue tallying exercise, making just the necessary policy announcements.