Budget 2023-24: Sitharaman must balance pre-poll compulsions with fiscal challenge

The government cannot let go of the revenue mobilisation efforts to maintain the growth momentum

Getty Images
Getty Images

KR Sudhaman

As is the practice, there is a demand galore before the 2023-24 budget for tax sops, whether justified or not. Finance Minister Nirmala Sitharaman has a difficult task cut out for her as she may have to address some of the genuine demands this time as it will be the last full-fledged budget of the BJP-led Narendra Modi government before the Lok Sabha polls in April-May 2024.

As it is, Sitharaman will have to make a tight rope walk to balance the growth momentum with inflation, though the slowdown is still at uncomfortable levels, partly triggered by the global economic situation.

Also, with recessionary trends in Europe and the difficult geo-political situation arising out of the prolonged Russian-Ukraine war, the Indian industry expects some handholding with exports growth not expected to be that buoyant.

While every section of the society expects some sops or others as all were badly hit during the two years of COVID, none is willing to understand government’s difficulty in raising more resources to meet their demand.

In view of the impending elections, the Finance Minister cannot afford to be harsh, particularly to the middle-class, the chunk of whom formed a major constituency of the ruling BJP. Certainly, the BJP government, or for that matter any government, does not have a magic wand or a milch cow to mop up additional revenue to present a please all budget.

Some genuine concerns may be met partially, but the government cannot let go of the revenue mobilisation efforts in the wake of the need to bring about fiscal prudence, to meet the high food, fertiliser and fuel bills and more importantly the need to push up public expenditure to maintain the growth momentum.

India’s tax-GDP ratio is still much lower than advanced economies. But high growth gave some room for tax mobilisation efforts. This year, both indirect and direct tax collections are buoyant.

In the COVID years, direct and indirect tax collections grew by around 40 per cent at over Rs 27 lakh crore in 2021-22. In 2023 till now, the overall growth has been good with the government mopping up over 85 per cent of budget estimates till December 2022. The direct tax collection has increased nearly by 25 per cent, while indirect tax by around 20 per cent. This trend is quite healthy. But revenue mop up efforts from disinvestment is not that encouraging so far.

Coupled with this, there is a valid reason to step up defence expenditure in the face of a belligerent China on the northern and eastern borders. The military spending was increased by 10 per cent to Rs 5.25 lakh crore in 2022-23 budget. This time, there would be a sizeable increase in defence budget in the wake of the Chinese attitude and difficult Indo-Pak relations.

The emerging situation in neighbouring countries like Afghanistan, Pakistan, Nepal and Sri Lanka is not all that encouraging. This may result in India extending a helping hand, particularly in the light of the food shortage in war-torn Afghanistan and terror-infested and flood affected Pakistan on humanitarian considerations.

As it is, India’s food subsidy bill is very high after the government decided rightly to provide food ration during COVID to 80 crore people, some of whom lost jobs. This food ration under Garib Kalyan Yojana has already been extended till December 2023.

India has supplied a sizeable quantity of wheat aid to Afghanistan and rice aid to Sri Lanka. Some more shipments are likely.  This came at a time when the government is committed to ongoing efforts to reduce its subsidy bill for quite some time but COVID has thrown this process out of gear.

India’s subsidy bill, comprising food, fertiliser and fuel is expected to be around Rs 5 lakh crore in the 2022-23 financial year. Expectations are that it could be reduced by nearly 25 per cent to Rs 3.8 lakh crore with some savings on food and fertiliser subsidy bill on account of some strategic imports long-term on reduced commodity prices.

The middle-class and salaried class were sandwiched during COVID the most as many lost jobs or took a salary cut, while at the same time, they did not have any safety net to fall back upon. They are going through severe hardships, that too with high inflation.

The senior citizens had it worse with bank interest rates falling and their savings eroding with increased medical expenditure during COVID. It has been a double whammy for them.

Sitharaman has said she herself belongs to a middle-class family and she understands their woes better. Also, the middle-class is the BJP’s constituency, particularly in North India.   From the BJP’s political considerations, this constituency needs to be addressed ahead of the election to nine state assemblies in 2023 and Lok Sabha elections in April-May 2024.

It is still wild speculation if Sitharaman will reduce income tax rates as it has been broadly rationalised. At the most, there could be small tinkering here and there. What is expected is the raising of the exemption limit so that the salaried class at the lower rung, middle class and the senior citizens depending upon pensions and interest on their savings get some relief.

To push real estate sector which is not looking up, Sitharaman may give some additional tax benefit on housing loan interest.

The quantum of standard deduction could be raised to benefit urban and salaried middle class with the gradual phasing out of work from home in service industries in vogue during COVID. There could also be some rationalization of capital gains tax.

There may not be much relief in corporate tax rates though there is a popular demand from chambers and industry. But some specific tax incentives could be there as the private sector investment is looking up.

Schemes like PLI could be extended to more sectors.

Public expenditure, which was pegged at Rs 7.5 lakh crore is expected to go up in view of the demand to improve logistics and infrastructure, which still had a huge deficit. The raise might not as steep as in 2022 budget when it was increased by over 35 per cent and roughly by Rs 2.5 lakh crore as compared to around Rs 5 lakh crore in the previous years.

It may be increased to around Rs 8.5 lakh crore taking into considerations the absorptive capacity. The capital expenditure in resurgent railways may be pushed up to Rs 2 lakh crore in 2023-24 as compared to about Rs 1.5 lakh crore in 2022-23 with several new projects expected.

The reeling MSME sector, one of the main job creating sector, certainly needs major help and the budget may provide some sops. One proposal that is doing the rounds is the introduction of MSME credit cards on the lines of Kisan credit cards to address the financial woes of the sector. The informal lending virtually dried up after demonetisation and an alternative has not emerged as yet.

Also, COVID made the situation worse, resulting in closure of 10-20 per cent of over 6 crore MSMEs in the country. Ninety-seven per cent of MSMEs are micro industries.

 (IPA Service)

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