As we approach the 2023-24 Union Budget, it is difficult to deny that India’s fiscal position, the banking system, and economic recovery appear to be much better than what one may have feared in March 2020. A lot of the credit for this should go to the government, which resisted calls for unlimited fiscal support, and adopted a targeted and reactive approach to tackling economic challenges, thereby avoiding the withdrawal symptoms many western economies are facing as they pull back their easy monetary and fiscal policies.
Signs of more normal State policies returning are appearing, albeit slowly. The government has been gradually withdrawing pandemic-related emergency measures, which should add to fiscal sustainability in the medium-term. The most critical of these was the Pradhan Mantri Garib Kalyan Yojana (PMGKY), the free food distribution programme that has now been merged with the National Food Security (NFS) programme, thus preparing the ground for the rationalisation of food subsidies. While no outright measures have been implemented on fertiliser subsidies, the moderating prices of imported fertilisers globally and falling natural gas prices should provide some cushion. This lowers the risk of pre-electoral populist measures, as reducing subsidies is always difficult and signals that the government is aiming to balance the need for welfare assistance against fiscal prudence.
On the revenue front, the government has been allowing prices to adjust gradually, and has been cautious in passing on the benefit of falling imported commodity prices to retail prices. This should allow it to recoup fiscal space, both from the point of view of increasing spending and reducing the fiscal deficit, which remains elevated, relative to historical trends. Indeed, the improvement in India’s tax-to-Gross Domestic Product ratio, which is often attributed to an unequal recovery with larger corporations gaining market share, has still helped in dealing with multiple and varied shocks, ranging from welfare assistance to raising subsidies to managing food prices and increasing capital expenditure. Still, the prospect of a return to normal may be rekindled as we approach the last full budget of this term for the National Democratic Alliance administration.
We see little room for experimentation as the government will continue supporting the buoyant, positive sentiment towards India. This should rule out any major tax increases in the budget, especially direct taxes. Indirect tax, in the form of the Goods and Services Tax, is outside the purview of the budget but may need to be reviewed at a later stage. We also see room for India’s financial system, especially public sector banks, to become a tailwind for revenues as their profitability rises, rather than a headwind in capital injections, and should lower the need for divestment-related revenues, with which to undershoot their budget targets.
A key thrust for the Budget is likely to be improving conditions for private investment, as chief economic adviser Anantha Nageswaran has asserted for some time. In this regard, the government may continue to spend aggressively as it did in the last few years to drive capex, and also expand its capex-related lending to states, a scheme that has had positive take-up and has helped India’s smaller states to plan and execute better than historically. This could mean that the government may continue pushing up the share of capital expenditure, perhaps closer to 20% of overall spending, taking the number closer to ₹9 lakh crore, the highest on record.
From a privatisation standpoint, the government could reassess the underlying objectives of why it should reduce its role in non-core areas, and it may shift the focus away from divestment (being seen as a revenue opportunity) to one where it is productivity enhancing. Indeed, a medium-term vision to boost the value of public assets over time would be welcome, especially for public sector banks, and could help lay the groundwork for the next round of public capex being driven by public sector undertakings (PSUs) on a commercial basis, rather than be government-led on growth considerations.
The fiscal outcomes have been excellent, considering the shocks India has faced in the past three years. The finance ministry must be complimented on this. Still, a medium-term imperative to reduce the high-debt burden and create fiscal space for the next crisis must be tackled, as the government conceded fiscal headroom by cutting taxes and raising subsidies to manage inflation through 2022. To rebuild some of those buffers, fiscal policy will have to eventually turn more restrictive, which would effectively push up taxes or reduce expenditure, but the need to take a decision can be postponed for now.
Rahul Bajoria is head, EM Asia (ex-China) Economics Research, Barclays. Shreya Sodhani is regional economist, Barclays The views expressed are personal
