Tax sops, fiscal consolidation tight rope walk for Sitharaman

FM Sitharaman will present her fifth straight Budget at a time when the economy is slowing due to global headwinds and specific sectors need attention.

Tax sops, fiscal consolidation tight rope walk for Sitharaman

Wednesday February 01, 2023,

4 min Read

Finance Minister Nirmala Sitharaman will have to do a tight-rope walk between staying fiscally prudent and general public expectations of lower taxes and a wider social security net, while at the same time firing the engines of the economy before general elections.

Sitharaman will on Wednesday present her fifth straight Budget at a time when the economy is slowing due to global headwinds and specific sectors need attention.

In the run-up to the Budget presentation, expectations are rife that she may tweak income-tax slabs to provide relief to the middle class and increase spending on the poor through programmes such as the rural job scheme while ramping up financial incentives for local manufacturing.

But all this she has to do while staying on the course of the fiscal consolidation path.

To her aid are inflation falling below the target and buoyancy in tax collections. Healthcare, education and the rural economy may get a first call on such revenues as well as sectors that create jobs, particularly in small businesses.

The Union Budget for 2023-24 (April 2023 to March 2024) would be the first normal budget after the COVID-19 shock and amid global geopolitical developments. The priority for the Budget is expected to be to maintain a reasonably high but stable growth in the medium term. Alongside, to establish fiscal credibility with a suitable incremental reduction in the fiscal deficit to GDP ratio.

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It would have the daunting task of progressing towards consolidation after the Covid-related fiscal push, and on the other hand, keeping an eye on needs on the economic growth in an atmosphere of slowing global growth and tightening domestic financial conditions.

On a strategic level, the broad reform process should continue with outlays earmarked for rural development, boosting manufacturing, employment generation, and capacity building through infrastructure.

Despite this being the last Budget before general elections, big doles may not come on Wednesday as the government may choose to unveil them in the interim budget to be presented next year before the April/May general elections.

Her recent comments on knowing the "pressures of the middle class" have added to speculation she would put some money in the pockets of taxpayers. But how she does that is to be seen.

Sitharaman has in the past budget looked at public spending to boost an economy emerging out of the pandemic and her resolve to stay fiscally prudent will be tested on Wednesday.

Markets are expecting some rationalisation in capital gains tax while there may be some tinkering with import duties on some items.

India has outperformed its peers in restoring growth and containing inflation. Even though the majority of currencies depreciated against the US dollar in 2022, the depreciation of the rupee against the US dollar has been relatively lower than that of other major currencies.

The pre-Budget Economic Survey on Tuesday projected the Indian economy slowing to 6-6.8% in the fiscal year starting April - still remaining the fastest-growing major economy in the world - as extraordinary challenges facing the globe will likely hurt exports.

The projection of India's gross domestic product (GDP) growth is higher than the 6.1% estimate of the International Monetary Fund (IMF) and compares with the survey's estimated 7% expansion in the current fiscal year (April 2022 to March 2023) and 8.7% in the previous year.

The major risk to India's growth trajectory arises from the continuing global supply-side uncertainties, including pressures on global crude prices. If these continue unabated, there would be additional pressure on inflation and policymakers would be forced to increase interest rates, which may have a dampening effect on investment.

Another consideration emanates from the global economic slowdown, which has dampened India's export demand. If the advanced countries suffer from excessive de-growth, India's export sector and the related domestic sub-sectors would face some pressure.

Edited by Megha Reddy