Union Budget 2023-2024: Finance Minister Nirmala Sitharaman will present the fifth consecutive Union Budget on Wednesday (1 February).
The previous two budgets were in light of the pandemic, and the Minister of Finance had to allocate fiscal space to support the immediate needs of the country.
the Union budget It is one of the most long-awaited documents by the government. While major policies and projects are announced throughout the year, the budget sets out both the current health of the economy and the direction in which the government intends to advance the economy.
The previous two budgets were in light of the pandemic, and the Minister of Finance had to allocate fiscal space to support the immediate needs of the country. However, with inflation and with the post-pandemic recovery boosting tax revenues, the central gross fiscal deficit is expected to be contained at a target of 6.4 percent for this fiscal year. In previous budgets, the Minister of Finance chose a longer path of fiscal consolidation, as the total fiscal deficit is expected to decline to only 3.5 percent by 2025. The Minister of Finance is expected to continue on this path.
The recovery in tax revenues is not expected to last, especially if inflation weakens and there is a decline in domestic demand in the next fiscal year. But concerns about revenue cannot be offset by any significant cut in government spending. Growth may have returned to the Indian economy, but the pandemic years have led to a downward shift in the absolute GDP or income of the economy. Also, with each revision in the GDP data for the Covid years, actual GDP is farther away from the trend of non-COVID GDP, indicating how much damage from the pandemic may take longer to reverse. With the multiple problems and challenges surrounding the country, it is still important to remember that some of the gains made in reducing poverty have been lost due to the pandemic. Therefore, the pressure on growth while managing inflation will continue to weigh on policy makers.
As has been debated in previous years, what will matter is not the fiscal deficit per se, but the quality of government spending. An essential component of successful income generation in an economy is the speed and timing of government investment spending. The government, in anticipation of a global slowdown that could slow exports, could stimulate the private sector by pushing forward the implementation schedule for some large infrastructure projects. While progress on many infrastructure projects has been good so far, highway networks have yet to pick up steam, and progress on power and energy has been modest. The focus should be on improving financial inclusion and technology connectivity outside of the first-tier cities.
Private sector investment is largely expected to wait out the period of global uncertainty with the exception of some investments in specific sectors. According to Deloitte’s forecasts, the projected GDP growth rate for fiscal year 2022-2023 is between 6.5 percent and 6.9 percent. NSO, according to its latest advance estimate, expects the GDP growth rate to be slightly above 7 percent. However, inflation is expected to remain at or above the RBI’s comfort levels this year and into next year, before easing in the second half of 2024. Downside risks to currency and the current account balance have also increased.
The government has limited sources of revenue. In the current environment, raising tax rates or introducing new taxes may act as a deterrent to private consumption. Apart from taxation, the other major source generally discussed is asset monetization and divestment. It is possible that the government will miss the liquidation target for the current fiscal year. In order to enhance revenues from this flow, the Iraqi government may need to consider policies that can bring in private players, particularly in selected sectors.
The biggest impact of the downward GDP shift has been on job generation. While the PLI scheme promotes ‘Make in India’, the employment multiplier still lies with services and SMEs. A key expectation from the finance department this time around is to use the budget to refocus on some critical structural reforms to stimulate investment in the services sector. The service sector has huge potential – be it retail, commerce, tourism or information technology. also, India competitiveness in the services sector and has a comparative advantage. An effort to assess the contribution of Global Inland Centers (GICs) and improve the regulatory ecosystem for such centers can revive the service sector and create opportunities for our workforce. It should be noted that despite the advantage of Indian talent, many global players are diversifying their investments in services, to other lower cost economies.
Reforms should be prioritized as the cornerstone of the strategy, in order to support the SME sector as well, in particular to reduce the complexity and costs arising from a large number of regulatory compliance.
In short, the Finance Minister is expected to use the upcoming budget opportunity to build on the reform agenda to ignite the engine of small entrepreneurship and job growth.
(Richa Gupta is a partner at Deloitte India, and Rumki Majumdar is an economist at Deloitte India. Opinions expressed are personal)
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