Insights
Anticipated impact of the upcoming budget on the Indian economy
February 1, 2024Government’s ability to impact the economy through the budget can never be undermined, even if it is an interim budget or a vote on account. The Indian economy is well-placed as a credible destination for global investors as many abroad are looking to implement a “China plus” strategy. Further, the Modi government has done an incredible job in marketing the India story to the international community. The general outlook in the domestic market also seems to be bullish. Indian stock markets taking over Hong Kong to become the fourth largest in the world, is yet another vindication of the upbeat outlook in India.
The Indian economy has demonstrated resilience to global headwinds and geo-political uncertainties. Amongst all the optimism, the Government will have to walk on a tightrope of fiscal prudence and yet provide more impetus to economic growth. India’s fiscal deficit numbers will be the headline message from the current government to its global and domestic audience. To achieve the target of 4.5% fiscal deficit by FY 2025-26, FY 2024-25 numbers will have to be set between 5.2%-5.4%. The expected fiscal deficit for FY 2023-24 is around 5.9%. Any major variance from these numbers can cast serious doubts on the longer-term India story. While India has fared better than most big economies on inflationary trends, a close watch on the same is essential while framing fiscal policies.
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Enhanced economic activities and a steady increase in tax compliances has resulted in record tax collections. The year-on-year growth in both corporate income tax and personal income tax collections have been formidable. Government’s focus on accelerated adoption of technology for income tax payments and related compliances, is a key factor contributing to this growth in tax collections. Notably direct taxes have witnessed a growth of 25% which is far ahead to the estimated growth of 10.5%. Indirect tax collections have also been modestly more than the budget estimates. Thus, India seems to be doing well as regards the key tax collection data. Theme around disinvestment needs to be brought back on the agenda.
On the more populist front, agriculture may be one sector that may be given more allocations. Last few years haven’t been great for this sector, and India has witnessed dismal growth in agricultural production with gross value added by this sector being around 1%. Controversies around the proposed farm bill have added more insult to the injury. Thus, increased allocations for fertilizer and fuel subsidies may be on cards. Further to boost rural demand, Mahatma Gandhi National Rural Employment Guarantee Act (“MNREGA”) may get a boost. There is also a case for introduction of welfare schemes for women and adding a futuristic touch by announcing grants in education sector especially for capability building in new-age technology such as chip designing and artificial intelligence.
On the expenditure side, it is expected that the Government’s focus on capex and investment in infrastructure development will continue. There have been reports that the Government is on track on its capex target of INR 10 lakh crores. We can expect more aggressive targets being set by the Government with at least a 10% increase on a go-forward basis. Capex expenditure is likely to constitute a quarter of the total expenditure for next fiscal year.
Overall, the vote on account can still be used by the Government as a platform to deploy the next chapter of Modinomics. It is noteworthy that this vote on account shall be presented before the model code of conduct becomes applicable. The Modi Government may use it as a stepping stone for a full budget in July 2024, on the assumption that it will be back in power.
This article was originally published in Financial Express on 1 February 2024 Written by: Sanjiv Malhotra, Senior Advisor. Click here for original article
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Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
