Firm focus on capex

THE defining hallmark of the Union Budget for 2023-24 is the sharp rise in capital expenditure. Compared to around 25 per cent rise during the current financial year (2022-23), it has projected an even sharper rise (on a higher base) of around 30 per cent in the coming fiscal. Where is this money going to come from? Not from tax revenue as tax receipt as a percentage of GDP is set to remain at exactly 11.1 per cent in both the current and next financial years.

Surely, the government must be seeking to save money (cut expenditure) somewhere to pay for the rising capital expenditure. Well, the pension bill will actually go down by around Rs 1,000 crore. The fertiliser subsidy bill will drop by a massive Rs 50,000 crore. So will the food subsidy bill, by Rs 90,000 crore. On the other hand, the government will spend Rs 13,000 crore more on education and Rs 11,000 crore more on healthcare. That works out to be a net saving of over Rs 1.2 lakh crore.

Beyond that, the Budget makes all the right noises, as is to be expected. But the devil is in the detail and in what is left out of the buzz. That takes time to identify.

What is clear and projected upfront in the Finance Minister’s speech are the goodies. The foremost among them which will please the most are the attractive incentives and rebates in the new income tax regime. Under the new regime (assessees can continue with the old one if they so wish), the government has tweaked the slabs, creating the impression that the tax burden has been lessened. But the catch is that those opting for the new regime will not be able to claim the exemptions and deductions that they can under the old one, such as house rent allowance and investments under Section 80C. So, each individual will have to look at his own calculations to decide under which regime he is better off. Hardly a straightforward goody.

The Budget has also announced a scheme to support state governments and municipalities in replacing old (over 15 years) polluting vehicles. Beyond generally giving a big push to auto sales, the scheme will also be a boon for leading manufacturers of electric vehicles such as Tata Motors and Toyota Kirloskar.

As for disappointments or what gets costlier, the foremost announced in the Budget is the tax on cigarettes which will go up by 16 per cent. It has been customary for taxes on cigarettes to be hiked to curb consumption of the cancerous stick. But there are bidis and gutkha to which those smoking cigarettes turn to when the latter get too costly. Is it possible that the government will earn more by way of tax revenue as volume-wise cigarette consumption will not fall commensurately? But the health of the nation will continue to suffer and the healthcare bill which the poor will have to foot will go up.

Less ambivalent and easier to understand is the Budget announcing changes in some indirect tax rates. The customs duty on imported parts for TV sets has been cut. Similarly, customs duty on certain imported parts for mobile phone manufacturing has also been reduced. These measures are clearly meant to make manufacturing of consumer electronics in India more attractive so that those seeking to shift factories from China to India are encouraged to do so.

But budgets are also known for highlighting arcane things. It is difficult to match this: Customs duty on seeds imported to manufacture diamonds in laboratories has been reduced. Isn’t that earth-shaking!

But what is non-routine about this Budget is that it is in a sense an election-year Budget. This is the last full Budget that is to be presented before the country goes to the polls in 2024. So, the Budget will also be looked at in terms of what pre-election goodies it contains. Well, other than the hype, like the focus on Amrit Kaal, there is not much. So, the government seems to be somewhat sure of its position in the coming elections and therefore has not seriously gone out to please.

Most importantly, any Union Budget is a key tool with which the government of the day lays the foundation for at least one more year of stable economic growth. On this consideration, the foremost signal that will be looked for is whether the pathway laid out ahead is intended to maintain fiscal stability and take forward fiscal consolidation. The Budget projects a fiscal deficit of 5.9 per cent of the GDP. This is lower than the revised estimate for the current year of 6.4 per cent, which exactly matched the figure projected in the Budget estimate! So, the Budget can be considered to be fiscally prudent.

The fiscal deficit, expressed as a percentage of the GDP, contains two major assumptions — one relating to the real growth rate that the government expects the economy to achieve, and the likely level of inflation. If growth has not done so well but inflation has forged ahead, the fiscal deficit figure (as a percentage of nominal GDP) will look more respectable than what it actually is. Conversely, if growth has not done poorly but inflation has been tightly controlled, the fiscal deficit figure will look poorer than what it actually is. So, take with a pinch of salt the fiscal deficit figure quoted above.

A guide to assess the assumptions that the government has made on growth and inflation in arriving at the fiscal deficit as a percentage of the GDP is to check how realistic were the assumptions made last year when the Budget for the current fiscal was presented. The 2022-23 Budget assumed a nominal GDP growth of 11 per cent. In the event, RBI projects real GDP to grow by 6.8 per cent and inflation to reach 6.7 per cent, resulting in a nominal GDP growth of 13.5 per cent. So, the nominal GDP is higher than anticipated, allowing a respectable fiscal deficit percentage to be recorded.

For the upcoming financial year, the government has assumed a nominal GDP growth of 10.5 per cent, almost the same as for the present fiscal. The nominal fiscal deficit is also projected to be about the same as it is in the current year. So, real GDP growth rate and inflation taken together will remain about the same as in the current year. But looking at the fiscal deficit figure (as a percentage of nominal GDP) it seems that things will improve! How does it all add up? Wish I knew.