Growth with macroeconomic stability has become the hall mark of Indian policy making in recent years. The 2023-24 Budget, which is a part of the overall economic reform process, is no exception. With elections on the anvil and global headwinds affecting growth it is always tempting to choose a softer consumption led approach based on freebies and giveaways. However, the Government has not deviated from the commitment about fiscal consolidation. The fiscal deficit was 6.4% in 2022-23, it is expected to come down to 5.9% in 2023-24 and slide down further to 4.5% by 2025-2026.

It is important to bear in mind- India’s debt to GDP ratio at 84% is still quite high compared to the pre-covid years. The saving grace is growth minus interest differential is still positive, so the debt could be sustainable. In this context, it may be pointed out that a reasonably conservative approach taken by policy makers have been welcomed by the bond market, ten year bond yields in fact came down albeit marginally after the budget speech. As of now the expectation is market borrowings will go up by about 3% over previous year’s revised estimates.

Another interesting feature of the budget is the overall size, in other words the total expenditure as percentage of GDP has been retained at around15%, similar to that of the last year. Within the budget there has been a change in the quality of expenditure, some of the subsidies have been pruned and there is a remarkable shift in favour of capital expenditure. It may be useful to point out that effective capital expenditure that is capital expenditure plus grant in aid for creation of capital assets was ? 5.2 lakh crores in 2019-20 the pre-covid year, this is expected to go up to ? 13.7 lakh crores in 2023-24. Capital expenditure will go up from 2.9% of GDP in 2022-23 to 3.3% of GDP in 2023-24. This increase in capital expenditure is no mean achievement, particularly when fiscal deficit and debt to GDP ratio are still elevated but under control. Needless to add, lot of implicit faith has been reposed on capital expenditure as a driver of growth, productivity, employment and income. Most of capital expenditures which are in the areas of connectivity (physical and digital infrastructure) and energy are supposed to drive GDP growth even when global headwinds are creating unanticipated obstructions. Indian Economy is expected to grow at 7% in 2022-23 and the baseline growth for 2023-24 is expected to be 6.5%. Given the 10.5% nominal GDP growth assumed in the budget papers, the impact of inflation rate is estimated at 4%. In view of the fact that inflation is hoovering between 5% and 6%, prudent fiscal and monetary policies should continue in 2023-24 such that inflation does not go out of hand.

It is interesting to note that private investment in India normally gets tethered to government investment, so in 2023-24 one could see a pick up in private capital formation buttressed by higher credit availability from banks. Further, balance sheets have become stronger after necessary deleveraging in the corporate sector. MSMEs too are expected to benefit from better credit availability. It is indeed true that there is a gestation lag between capital formation and flow of goods and services from the facility; it would be useful to remember that policy makers have been following a process of increasing capital expenditure since 2019-20, some of the infrastructure projects are nearing completion stage. Basically, when investments go up then in the initial years incremental capital output ratio increases thereafter it comes down and stabilises, as capacity utilisation and GDP growth reaches its potential. The bulk of the investments taking place in railways and connectivity related projects would bring down the logistics cost significantly and at the same time improve overall productivity. The focus on capital expenditure and investment led growth will certainly impact employment, income generation and consumption positively over a longer period. The results cannot be observed immediately within year. In that sense, the steps taken indicate a commitment to a long term development trajectory.

This is not to suggest government has jettisoned the basic welfare schemes, the Centre will provide 5 kg of free food grains to 81.35 crore beneficiaries of the National Food Securities Act (NFSA) for one year starting from January 2023, in fact food subsidy under NFSA which cover’s FCI’s procurement costs, State agencies procurement costs, logistics cost would continue.

From the budget documents it appears that some kind of re-prioritisation is taking place in the welfare schemes; for some of the schemes the allocations have been pruned, in others they have been maintained nearly at the same level and in schemes like Jal Jeevan mission for natural drinking water the expenditure is expected to go up significantly. The easier alternative for a populist policy maker would have been to increase welfare scheme expenditures and maintain status quo in capital expenditure. A government left of centre possibly would have increased the tax to GDP ratio from the current level of 11.1% simultaneously.

The fact that the current government did not pursue any of these has brought back certain degree of confidence in the capital market which was apprehensive about a change in capital gains tax structure and a possible introduction of inheritance tax. The level of confidence was further strengthened by the substantial increase in capital expenditure even as the economy continues to maintain its fiscal prudence. Fiscal consolidation measures have been welcomed by both domestic and foreign investors. The key issue however is to make the Indian market more attractive in comparison to other emerging markets including that of China.

Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.

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