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Global Slowdown To General Elections: Union Budget 2023-24 Is Crucial For Modi Govt

The Indian economy is likely to grow at 7 per cent in 2022-23 as compared to 8.7 per cent in 2021-22, as per data released by the National Statistical Office (NSO)

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The people of the entire country have marked the date on their calendars as Union Finance Minister Nirmala Sithraman is all set to present the Union Budget 2023-24 on 01 February 2023, a crucial event as the world is bracing for an economic slowdown and India is gearing up for general elections.

This budget is being presented at a crucial juncture of global slowdown, geopolitical uncertainties, high inflation and tightening monetary rates all across the globe. As India’s growth took a hit from declining demand at home and abroad, the country is set to lose its fastest-growing major economy tag this year.

The Indian economy is likely to grow at 7 per cent in 2022-23 as compared to 8.7 per cent in 2021-22, as per the advanced estimates of national income for 2022-23 revealed by the National Statistical Office (NSO). 

"Real gross domestic product (GDP) or GDP at constant (2011-12) prices in the year 2022-23 is estimated at Rs 157.60 lakh crore, as against the provisional estimate of GDP for the year 2021-22 of Rs 147.36 lakh crore, released on 31 May 2022," NSO said.

According to the estimates, the fall will majorly be because of the poor performance of the manufacturing sector. Also, the manufacturing sector's output is likely to decline to 1.6 per cent as against a growth of 9.9 per cent in the financial year (FY) 2022

Hence, experts noted that in this scenario, Prime Minister Narendra Modi-led central government need to take calibrated steps to boost domestic sources of growth that would be crucial to maintain the steady economic growth trajectory.

National body PDD Chamber of Commerce and Industry and Deloitte India in their pre-budget memorandum have urged the Centre to prepare for a global slowdown and focus on sectors that can make India an attractive investment destination. 

“The broad contours of the budget are unlikely to look much different from the previous few budgets. The speech should continue to highlight the critical thrust areas of the government— agriculture, social security net and investments,” said Indranil Pan, Chief Economist, Yes Bank.

Deloitte India said that the Production Linked Incentive (PLI) scheme and infrastructure plan are a success and with the National Logistics Policy (NLP), there will be a substantial reduction in production cost. The government must focus on the fast completion of projects and the efficient execution of initiatives. The other expectation would be raising capital for investments through asset monetisation.

Yes Bank’s Pan added that the light could once again be on the PLI schemes, via which the attempt would be to enable private investments to pick up. “The government could also be seen tinkering with the import duty structure so as to continue with its endeavour of protecting the domestic industry as a champion of the Atmanirbhar Bharat strategy,” he said.

Tax, tax and tax—

India’s income taxpayers are also putting high hopes on the government to announce some tax-related relief or change in income tax slabs. Presently, the maximum slab of income which is not chargeable to income tax is Rs 2.5 lakh. For persons who are between 60 to 80 years, the exemption limit is Rs 3 lakh and Rs 5 lakh is for citizens above 80 years.

“We have been demanding for raising the exemption limit for personal income tax to Rs 5 lakh from the existing 2.5 lakhs. It is based on the premise that it would leave more money in the hands of middle-class consumers. Thus, there would be a demand push for economic growth,” said Deepak Sood, Secretary General, Assocham.

Sood added that government should increase the exemption limit for income tax to at least Rs 5 lakh so that more disposable income is left in the hands of consumers and the economy gets a consumption boost and further leg-up in the recovery.

Saket Dalmia, President, PHD Chamber said, "A uniform capital gain taxation is also something that is much needed and needs to be addressed. With different asset classes available to invest in India, every asset class has a different capital gain structure, which often makes it difficult for taxpayers to assess their tax liability on the capital gains incurred."

Interestingly, Meghnad Desai, Chairman, Meghnad Desai Academy of Economics (MDAE) and Professor Emeritus, London School of Economics said that budgets are strange exercises. We pretend that once a year, the finance minister presents accounts of the previous year and makes promises of the taxes and expenditures for the coming year. 

"Then we pretend that if at this late stage, we express our wishes or make our demands, they would be included in the Budget. The demands are the usual ones (for the middle classes at least) of cuts in income tax. Other sections hope for generous benefits," he added. 

Experts also noted that the Modi government should lay emphasis on sustainable growth in demand, which will require efforts to create jobs and increase income generation opportunities. India is a domestic demand-driven economy, and so far, recovery in consumer spending has not been sustainable. The move will put more money in consumers’ wallets.

“Along with consumption, the other path to sustainable growth would be further promoting investment. In this direction, a 15 per cent corporate tax rate for new investments in manufacturing can be extended to all sectors, including services,” Sood stated.

On the other side, regarding indirect taxes, the PHD Chamber also suggested that goods and services tax (GST) needs continuous improvisation and broad policy changes from time to time to provide an overall objective of ease of business to the trade and industry. 

“Certain highlighted suggestions are rationalisation of multiple GST rates into two to three-tier GST rates, decriminalisation of offences in GST law by increasing the threshold from Rs 5 crore to Rs 20 crore and should be prosecuted on the basis of fraud intent only,” the industry body added.

The good and bad—

Pan believes that the good part of this year’s budget is that some of the committed expenditures– such as the free food programme are being withdrawn. Fertiliser subsidies are also unlikely to bulge as in FY23, given the relative softness in the global crude oil prices. Thus, there could be some room created for the budget-making exercise as these expenditures are vacated.

However, it is interesting to note that the nominal GDP growth will be much lower in the next FY compared to this FY. The implication of this will be on tax collections. Notably, the biggest advantage for the tax collections in FY23 has been the much higher nominal GDP growth than what was accepted within the budget-making exercise. 

“This enabled the government to seamlessly absorb the higher committed expenditures for FY23. Nominal GDP growth for FY24 is being estimated by us at around 11 per cent, but there could be downsides if the inflation cools off faster than expected,” stated Pan.

The challenge—

The year 2022 witnessed the highest global inflation in 50 years and the most aggressive monetary policy tightening cycle in nearly 40 years. Global inflation is past its peak now but remains elevated. Thus monetary conditions are likely to tighten further and remain tight through 2023. 

Although, India's consumer price index inflation for November decreased to an 11-month low of 5.88 per cent from 6.77 per cent in October, according to the data released by the Ministry of Statistics and Programme Implementation (MoSPI).

"India is not an island— it needs to export and it needs global fund flows to finance its development needs. Surely, the reflection of the stronger global headwinds has been in the weaker growth in exports," said Pan. 

However, if experts are to be believed, the worst of the external sector headwinds are also possibly behind us, given that global oil prices and other commodity prices have moderated. As domestic growth slows, the non-oil non-gold imports will come lower.

Desai also suggested that India should create an independent body such as the Office of Budget Responsibility in the UK. The Finance Commission could be made a standing Commission in this regard as it has independent Constitutional status. Such a Commission can scrutinise the budget independently. "The problem of unfunded pensions which had been discussed for a while now can only be clarified by such a body," he stated. 

Meanwhile, Mahesh Jaising, Partner, Deloitte India said, "The Union Budget FY2023 is the last full budget of the current government before the general elections in May 2024. It is expected to cover important issues affecting the economy, particularly employment opportunities, talent upskilling, the rising cost of living, and income brackets."