The Budget to usher in the Amrit Kaal

This piece is part of the essay series, Amrit Kaal 1.0: Budget 2023

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India’s Union Budget 2023-24 was presented on 1 February 2023 against a dismal global economic backdrop where India shines as the only bright spot. This was reinforced by Finance Minister (FM) Nirmala Sitharaman during her budget speech, “… Our current year’s economic growth is estimated to be at 7 per cent. It is notable that this is the highest among all the major economies… The Indian economy is therefore on the right track, and—despite a time of challenges—heading towards a bright future”. There is no denying of this phenomenon. Though the Budget remains an annual exercise, its long-term importance lies in the fact that it always indicates the overall direction that any dispensation intends to drive the economy towards. This budget does that exercise quite successfully. It clearly reveals the long-term vision of the government. The budget seems to be grounded in reality, the present global backdrop, the Indian ethos and ambitions, and state-of-the-art development thinking.

Income tax rationalisation will promote growth

The brightest lining emerged with the direct tax proposals. While doing so, the FM has also attempted to move the “terms of trade” in favour of the new tax regime as compared to the old tax regime. In terms of present practice for both old and new tax regimes, those with an annual income of up to INR 5 lakh are exempted from paying income tax. The budget has now proposed to increase the rebate or exemption limit to an annual income of INR 7 lakh under the new tax regime. At the same time, the tax slabs have been changed with the initial income slab with zero tax being modified to INR 0-3 lakhs per annum from INR 0–2.5 lakhs. As proposed by the FM, this will result in lower tax burden under the new tax regime, and will increase disposable incomes. This is definitely a pro-growth measure. An increase in disposable incomes in the hands of the lower- and middle-income groups, who comprise the salaried class, will definitely boost consumption demand for the economy.

The budget seems to be grounded in reality, the present global backdrop, the Indian ethos and ambitions, and state-of-the-art development thinking.

Over the last three decades, the Indian growth story was organically consumption-driven: This creates an avenue for the government to play with the consumption variable to spur growth through reduced taxes or increased transfers. While the slide in growth as a result of the pandemic was also largely attributed to a decline in consumption expenditure, the present revival of the growth numbers is also attributable to that, as rightly noted by the Economic Survey 2022-23. Therefore, while this is the positive side of things, the other aspect that the FM and the policy-making machinery need to keep in mind is that the widening wealth inequality in India is symptomatic of a counterproductive force leading to future economic slowdown. This is because the marginal propensity to consume (defined as the extent of increase in consumption due to increase in incomes) of the lower and the middle classes are higher than those of the richer classes. Therefore, while a unit increase in disposable income in the hands of the lower or middle income groups are likely to find the consumption avenue and spur growth, increase in incomes of the richer classes will go into the savings stream and get converted to assets or wealth, thereby, further increasing wealth inequality. Therefore, the idea of a wealth tax and using that for either capital expenditures or transfers or fiscal consolidation would not have been a bad idea.

A model of Inclusive growth

The budget acknowledges that growth is not sufficient by itself. That’s why FM clearly put across the message that, “… the Amrit Kaal includes technology-driven and knowledge-based economy with strong public finances, and a robust financial sector”. The budget rests on three principles: First, facilitating ample opportunities for citizens, especially the youth, to fulfil their aspirations; second, providing strong impetus to growth and job creation; and third, strengthening macro-economic stability. These three objectives are stated to be contingent upon seven principles, namely, a> Inclusive Development, b> Reaching the Last Mile, c> Infrastructure and Investment, d> Unleashing the Potential, e> Green Growth, f> Youth Power, and g> Financial Sector. The budget, therefore, attempts to cover a gamut of issues that touch upon the very fundamental principle on which the Sustainable Development Goals (SDGs) are embedded, namely, addressing the irreconcilable development trinity of equity, efficiency and sustainability. By talking of youth and women, as also increasing budgetary allocation for health and health education, skilling and education, the budget has attempted to address the critical concern of human capital. This is very important given the fact that that in January 2023 itself, India surpassed China as the world’s most populous country as estimated by the World Population Review (WPR). This has created massive opportunities in the form of raw human capital, as also challenges to harness this huge potential that can trigger future growth.

The idea of a wealth tax and using that for either capital expenditures or transfers or fiscal consolidation would not have been a bad idea.

On a similar note, the budget acknowledges the role of infrastructure and capital expenditure for creation of physical capital. Therefore, quite expectedly, as is needed for a growing nation that aspires to grow further, capital investment outlay has been increased steeply for the third year in a row by 33 per cent to INR 10 lakh crore, that is tantamount to 3.3 per cent of GDP. On this note, one particular aspect needs to be clarified: The simplistic linear Keynesian perception that such capital expenditure (capex) might result in crowding out of private investments is wrong. Rather, governmental capex is needed for those domains where private investors hardly venture into due to high gestation periods and imperceptible returns in the short-run. On the contrary, such capex will only ameliorate business conditions, reduce transaction costs of doing business, enable business competitiveness and promote private investments. At the same time, various estimates including those by NIPFP and the RBI have concluded that both the short and long-term multiplier effects of such capital expenditure are many times higher than those of revenue expenditure. It is indeed heartening to find the mention of the term “green growth” in this budget. However, the flip side to this also needs to be considered. The “green growth” notion is largely based on “green transition”, where the concern of biodiversity has hardly featured so far. Rather, the creation of large-scale infrastructure can definitely entail land-use change thereby shrinking green spaces and carbon sinks. This can go against climate action. The budget however has not really thought about this aspect. But what is interesting is the FM’s acknowledgment of the roles of local communities in conservation efforts while talking about the important ecosystem services of the wetlands. There remains an opportunity here to incentivise local communities in their important roles in conservation and to play such roles more actively. There have been global experiments with ecosystem markets through creation of PES (Payment for Ecosystem Services). While this budget has not gone to that extent, in future budgetary allocations, a leaf can be taken from those learnings. This serves triple objectives if supported by governmental initiatives: a> help the conservation goals, b> help the community’s economic conditions through income generation, and c> helps in sustainable development financing. The other noteworthy aspect of the budget is the enormous thrust on inclusivity through the connectivity, water, and social sector programmes.

By talking of youth and women, as also increasing budgetary allocation for health and health education, skilling and education, the budget has attempted to address the critical concern of human capital.

Integration of agricultural markets?

There has been a huge emphasis on development of digital public infrastructure for the agricultural sector. It is envisaged that through this development and with better dissemination of critical information and data on prices, stock, etc., farmers will be in a better position to take decisions on crop choices, acreages, etc. The big question is: Will this help the traditional thorny concern of Indian agricultural sector, i.e., fragmented agricultural markets? Will this help market integration? Of course, electronic spot markets have so far not been able to resolve such problems. Yet, there is no doubt that DPIs are the necessary conditions to help the cause of market integration, even if they may not be the sufficient condition to do so. One more thing deserves special mention here, and that is the emphasis on millets, which are more nutritious and less water-consuming than other staples like paddy and wheat. However, while budgetary allocations to achieve the avowed goals of promoting millets is definitely in the right direction, the need for the right price signal cannot be underestimated. Therefore, millets should not only be promoted by changing the terms-of-trade through their increased Minimum Support Prices vis-à-vis other staples, but it should also be supported through governmental procurement mechanisms.

While budgetary allocations to achieve the avowed goals of promoting millets is definitely in the right direction, the need for the right price signal cannot be underestimated.

Concluding Remarks 

On the whole, while there are developmental implications in the right direction in this budget, the fiscal consolidation aspect has also been kept in mind in the budget. Therefore, the projected fiscal deficit has declined from last year. This augurs well for the macroeconomic health of the Indian economy that seems well-prepared to embrace Amrit Kaal.

• Indian Economy
• Economics and Finance
• India
• Amrit Kaal
• budget
• Economy
• infrastructure
• Investment
• Nirmala Sitharaman
• SDGs
• tax

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