Budget 2023: FM has a tough task to balance growth and fiscal prudence

• Budget 2023 will likely continue to focus on capital expenditure as a growth driver and give an impetus to Make In India as well.
  
• Post the pandemic, our fiscal deficit has doubled, and debt to GDP has gone up from 75% to 85-90%. Fiscal prudence is the need of the hour.
  
• The Production Linked Incentive (PLI) scheme and infrastructure plan are a success and with the national logistics policy, there will be a substantial reduction in production costs and an increase in India’s competitiveness globally.

The Budget 2023 will be Sitharaman's fifth budget as finance minister under PM Modi government. She faces the Herculean task of promoting growth and walking on the path of fiscal discipline as well. There is a lot of expectation from this budget from all facets of the nation considering this shall be the last full budget of the Government before the National general elections in 2024.

I am penning down my 7 pointers which I look forward to from this budget:

1. Growth:- India was the fastest-growing economy in 2022 and is most likely to achieve this feat in 2023 as well (amongst the top 10 economies globally). However, promoting growth in a world marred by slowdowns and recessionary trends is going to be extremely difficult in 2023. Budget is expected to be growth-oriented by increasing spend in infrastructure, healthcare, and education. Being a pre-election budget and considering rural Indian demand has been subdued since the pandemic; we should not be surprised if the budget is mildly populist too. Budget 2023 will likely continue to focus on capital expenditure as a growth driver and give an impetus to Make In India as well.

2. Taxes:- The government has 3 key revenue sources — tax revenues, asset monetization, and debt funding. Direct and indirect taxes were ahead of expectations in 2022. However, growth in tax revenues might start declining in 2023 considering that the GDP growth rate is set to slow down this year. FM might also rationalise personal income-tax rates to lift demand and growth, considering the same has remained unchanged since 2014 and it’s a pre-election budget. Thus, the Government of India needs to focus more on tax inclusiveness going forward. Historically, our tax-to-GDP ratio has been relatively very low. With comparable economies being at 24-25%, we are at about 11%. Efforts should be made to expand the tax net and find newer taxation avenues (such as carbon emission tax or green tax) to spur up income.

3. Fiscal prudence:- Considering Government had to support the needy in a difficult 2022, many subsidies, specifically on food and fertilizer, have gone up by at least ₹2-2.5 lakh crore over budget estimates in 2022. Government should prudently look to cut back some of these subsidies considering global food prices and domestic inflation has abated. Post the pandemic, our fiscal deficit has doubled, and debt to GDP has gone up from 75% to 85-90%. Fiscal prudence is the need of the hour and the Government should come out with a proper plan to contain the same over medium term.

4. Infrastructure: It may play a significant role in the government's financial plan for the upcoming fiscal year, as it does in every pre-election budget. The government might not be afraid to announce a greater allocation this year to address growth challenges in FY24 because infrastructure is a significant engine of growth and generates jobs.

5. Job creation:- For the last 2-3 years, jobs were not picking up because of Corona. India’s unemployment rate is still over 8% despite having overcome the pandemic. There is a need to find new sources of revenue so that public expenditure for people affected by inflation and unemployment can be spent on them to improve their quality of life.

6. PLI Scheme:- Global slowdown is an opportunity for India because of the challenges the U.S. is facing right now on inflation, tight monetary policy, energy crisis in Europe and China+1 strategy being implemented by global manufacturers. The Production Linked Incentive (PLI) scheme and infrastructure plan are a success and with the national logistics policy, there will be a substantial reduction in production cost and an increase in India’s competitiveness globally. The government must focus on the fast completion of projects and the efficient execution of these initiatives.

7. Disinvestment:- Government needs to get bold and move out of loss-making and sick PSU units. There is no point wasting taxpayers' money on businesses that have perennially been making losses. The Government showed its intent by selling off Air India but still has several such assets which need no further pampering or parenting. As tax collections in 2023 are not expected to be as robust as past 2 years, Government should look to bridge the gap using asset monetization.

Additionally, consideration should be given to promoting initiatives such as co-lending to expand financial inclusion and extend reach to underserved customer segments.

While India is domestic demand driven economy, challenging global growth issues will have its impact on exports, manufacturing and investments. Focus on fiscal consolidation can cause growth to slow down domestically and a populist budget if pursued runs the risk of causing inflation. I am sure Government will address these challenges and trade on a path of growth and fiscal prudence. I expect the budget to continue providing economic stability and a growth environment for the core sectors.

(Ujwal Shah is Chief Equity Strategist and Fund Manager, IIFL Securities)