Imperatives for the Budget in election year

Union Government’s Budget for the year 2023-24 would perhaps be the last full budget of the second edition of the NDA government. Next year would be a holding statement, as the present government would like to use the post-election full budget to make a statement on their political intent.

Last year was the year of “unpredictabilities”. While we expected Covid-19 to play tricks on us, the Ukraine war, consequential oil price rise and then inflation grabbed centre stage. Quantitative Easing (QE) that followed in the wake of the global financial crisis had to go. The burgeoning inflation threatened spiraling and the resultant tightening is driving many countries of the world into recession. IMF has predicted a huge drop in global growth from 6 per cent in 2021 to 3.2 per cent in 2022, sliding further to 2.7 per cent in 2023, thus stalling global growth.

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Closer home, India pushed by the global headwinds, had its central bank quickly jettisoning the narrative of “Transitory Inflation” and frontloaded action to increase interest rates and decrease liquidity. Finance ministry too chipped in by improving tax collection and controlling expenditure. The result has been a check on Inflationary expectations. Although, inflation has breached the upper band of 6 per cent and general government debt-to-GDP ratios are uncomfortably high at 85 per cent.

So, what are the imperatives for the Budget in an election year?

Sustaining growth above 6 per cent with equity, especially low inflation, would be the keystone of the strategy. Large-scale reforms cannot be expected, especially, if they attempt to rationalise expenditure aimed at powerful sections of society. The global scenario does not offer much hope for increasing exports. Fiscal space for a substantial increment in government capex is limited. Thus, growth has to come from private investment and an increase in consumption expenditure. Consumption also needs to increase in middle and lower-income categories, where it is lagging now.

Globally, US has seen both the asset classes, stocks and bond yields taking a massive hit as inflation is sticky. Europe is beset with high inflation, high rates, and poor stock performance. China has its set of problems, where growth has stalled, a banking crisis is looming on account of the property sector collapse and inflation is high. Brazil and South Africa are not doing any better. Thus, the investible global dollar, especially meant for emerging markets (EMs) can potentially move to India in a big way, as it did to China once.

Currently, India’s growth trajectory is reading well. However, growth cannot be sustained on the basis of government capex alone. Fortunately, the corporate sector is picking fresh investments, both on account of the PLI scheme as well as fresh demand. At least, the firms are investing in debottlenecking their manufacturing processes to meet the incremental demand.

The banking sector is free of the NPA drag and digitalisation has permeated deep. However, considering the sparse liquidity in the system, the development of the corporate bond market is now an absolute must. The scope for overseas investment in corporate bonds needs to be widened further. Inclusion of Indian bonds in the global indices is the other requirement that will call for better market-making domestically as well as providing a level field between debt and equity. We need to understand that bonds are yield play and not the coupon rate. AIFs are the other instruments from which global investments tend to come. However, they too have niggling tax issues. Overall tax collection this year has kept pace with the nominal rate of growth. This provides an opportunity to reduce the effective marginal rate in personal income tax which will spur consumption. The national loss here can be made up through improving collection efficiency as well as tax collection on account of additional consumption.

India’s debt-GDP ratio though high is mercifully rupee denominated and thus poses no immediate threat. However, to bring down both the interest burden as well as the debt stock, it may be essential to have a steeper glide path to the FRBM-mandated level of fiscal deficit. That will free up investment space for the private sector. The Prime Minister has talked about controlling freebies, states too, and need to pay heed.

CPSU stocks and ETFs are doing well in the market. This offers an opportunity to raise additional revenue through the minority sale of CPSU stocks. Many big-ticket disinvestments perhaps may not be possible this year.

With our G20 presidency, the focus is on India. To get global dollars in larger quantum this year, the Budget would have to ensure tax stability, a credible fiscal deficit reduction glide path, bond market reform, and measures to spur private domestic consumption.

(The author is Chairman of the board of HDFC Bank and Ex-Secretary, DEA, Government of India)