How Budget 2023 will set Indian economy's compass in new world order

Big-ticket capital expenditure may facilitate business and trade

80-Nirmala-Sitharaman-new Illustration: Jairaj T.G.

FORGET COVID WAVES; it is time to ponder over the waves and undercurrents of the river. The river of economics we all are swimming in, that is. Sanjay Kumar, a tax and public policy veteran and a former bureaucrat, uses the analogy to convey the mood on the eve of this year’s union budget.


“Growth is like the water flowing in the river. As long as there is water in the river, we can manage the economy. But if the water dries up, [the pebbles and rocks on the river bed] will hurt us.,” Kumar, now a partner with Deloitte India, said.

It could well be a case of your river being half full or half empty, depending on how you look at it. Referring to all the business confidence and CEO surveys pouring in expressing optimism about stellar growth in the coming financial year, Indian economy’s future sounds all hunky dory in the year of a possible recession―good (news) enough to warm the cockles of Finance Minister Nirmala Sitharaman’s heart. The river is full and flowing, and hey, $5 trillion economy, here we come sailing in, it would seem.

But there are also the veritable pessimists in the mix, who see the river not just half empty, but running shallow. They point to the over-the-board spending the government was forced to do in the Covid years, which saw fiscal deficit (the gap between the money government spends and the money it earns via taxes) shooting up to 9.3 per cent. The recommended upper limit is 3 per cent. Right now, even the best estimates are that it will not fall back to the recommended level for at least another three years.

Or the current account deficit (the difference between the country’s exports and imports) being at a nine-year high. ‘Private consumption’, the term that refers to spending by the common man, an important requisite for any economy to be buoyant, has not yet picked up despite some ‘revenge buying’ and festive season spurts.

“The single most important issue for the government is inflation,” said Ashish Gupta, consulting CEO of the Federation of Associations of Indian Tourism & Hospitality (FAITH). “All [budget] measures should be focused on bringing it under control.”


Most worrisome of all, they warn of a possible recession hitting the advanced economies. While India is less likely to go into a recession, the tailwinds of a recession hitting rich countries it does business with could well have a sizeable downstream impact―on jobs, business growth and the much-needed foreign investment.

“The economy is substantially expensive now, from the petrol we pay for to the bike we buy,” said Saket Dalmia, president of the PHD Chamber of Commerce. “Prices of commodities have skyrocketed all over the world, with the geopolitical situation causing price fluctuations. But the good part is that this government understands it, and is responsive.”


For Sitharaman and company, not to forget Prime Minister Narendra Modi who has been doing his own series of pre-budget consultations, the preferred plan would be to go in all guns blazing, spending big and hoping it hits the bullseye.

It is a strategy the government has stuck to since the onset of Covid―first coming in with a series of stimuli and restructuring measures billed ‘Atmanirbhar Bharat’, followed by a budget that raised capital expenditure spending by a bold 35.4 per cent, primarily on infrastructure.


The hope? A domino effect of better infrastructure, coupled with simplified laws that will not only improve ease of doing business, but also nudge the private sector to make capital investments, leading to job creation, increased spending and improved GDP.

But it came with its own challenges. India Inc has, mostly, not risen to the call, preferring to wait and watch, even while shrewdly trying to get the best benefits and exemptions out of the government’s largesse. On more occasions than one a frustrated finance minister had called them out.


While tax collections have been stellar for a while with GST collections scaling new records month after month, it might not continue to be so. Inflation, though easing up at the moment, and the expected global recession would mean that balancing the account books and finding means to bring down debt should take priority.

India’s GDP grew 8.7 per cent in 2022. Even the best estimate pegs it at just 7 per cent this year. In fact, a Goldman Sachs prediction says it would go below 6 per cent. And the brunt of the global recessionary tailwinds would see growth falling further to even 5.5 per cent in financial year 2024, going by advance estimates.

Then there are the geopolitical uncertainties―the Ukraine war came virtually out of nowhere and turned the post-Covid hopes of a quick recovery topsy-turvy―and China with its unnerving potential to waylay the best-laid plans.

Throw in the fact that nine states will go to the polls in 2023, and that this is Sitharaman’s last full-fledged budget before the Lok Sabha elections in the summer of 2024, and you realise the political stakes could not be higher.

There is a lot riding on what the lady unveils on February 1 in Parliament―right from whether Narendra Modi’s legacy will also include being a three-time prime minister, to the very direction the Indian economy will take in this new world order.


While managing the fiscal deficit better will be a headache, many believe the trend of big spending of capital will continue. Tax collections improved by 26 per cent last year, while inflation in December dropped to 4.9 per cent from persistently staying above 7 per cent in the first few months of 2022. Leading economists, at their meeting with the prime minister at NITI Aayog a week ago, are said to have recommended the capex push.

“The message this government is giving is clear―it wants to help industry flourish, it wants to make India competitive and it is willing to go the last mile to protect the industry from the recession that is coming in many parts of the world,” said Dalmia.

“Spending on infra will facilitate trade as well as ease of doing business,” said Sanjay Kumar of Deloitte, who pointed out how the investment in existing infra and processes has helped in reducing the release time of export shipments substantially, as per a Central Board of Indirect Taxes & Customs (CBIC) report. “Such improvements facilitate trade. And it is expected that similar higher infra allocation will continue to be made. These will further help in easing the supply side constraints, making the country more competitive,” he said.


But in an election year, the hinterland can expect its share of mollycoddling, too. “This budget is going to be [all about] the rural economy, the lower middle class and the middle class,” said Sethurathnam Ravi, economist and former chairman of BSE. “Budgetary allocation for agriculture and rural economy, including incentives and tax breaks, will be higher.”


Many believe it is an idea whose time has come, and not just because of the polls. “A massive education of farmers, upskilling and digitisation, teaching them to use technologies, all is required,” said Kumar.

Considering how schemes like MNREGA (rural job guarantee) Ujjwala (gas connections to the rural poor) and direct benefit transfers have been pivotal to election wins in the past, the focus on rural economy is expected to look beyond agriculture, into matters of health care and education. “Twenty-seven per cent of the country does not have the wherewithal to access health services,” said Sanjay Kumar. “A public health infra in place will help an individual to reduce own expenditure on health and well-being, allowing them to focus and spend money on education, housing and living.”


And maybe, the macroeconomy picture might just gel well with that perpetual dream of the salaried class and professionals on the eve of every budget―the raising of income tax exemption limits. Sitharaman has been professing her middle-class credentials at public meetings.

The current exemption limit is Rs5 lakh, and expectation is rife that it may be raised by Rs1 lakh or Rs2 lakh. A rationalisation of capital gains tax, as well as provisions like the five-year limit on the 15 per cent corporate tax slab introduced in 2019 are also on the wish list.

For Sitharaman and Co, the challenge is simple enough―build on the blueprint of past budgets by big-ticket capital expenditure to facilitate business and trade, even while offering enough revadi to the masses so that they are cajoled into spending and reviving the economy―all the while, keeping an eye on the fiscal deficit math. The contents of her red bahi-khata pouch holds the key to how exactly she hopes to do that, and how bountiful the river will be in the years to come.


* Target for 2023-24 fiscal deficit likely to be set at 5.9 per cent

* Fiscal consolidation to be supported by lower subsidy spending

* Gross borrowing in 2023-24 seen at around Rs115.5 lakh crore, compared with Rs114.2 lakh crore in 2022-23

* Nominal GDP Growth (includes inflation) in 2023-24 seen at around 10 per cent to 10.5 per cent, compared with 15.4 per cent projected in 2022-23

* Capital expenditure in 2023-24 likely to be increased to around Rs19 lakh crore, compared with Rs17.50 lakh crore projected in 2022-23

* Steps to boost consumption, particularly rural

* Increase allocation to rural employment scheme (MGNREGA)

* Enhanced schemes like production-linked incentive to further boost manufacturing and exports

* Keep market borrowing in check

* Rationalise long-term capital gains