Budget 2023: Will The Budget Be A Trade-Off Between Economic Growth And Fiscal Consolidation?

The economy, which contracted by 6.6 per cent in FY21 due to the pandemic, started a mild recovery from the second quarter of the last fiscal. It is gradually growing due to rising demand, especially in the services sector

Finance Minister Nirmala Sitharaman is scheduled to table her fifth and the last full Budget of the Modi government 2.0 for FY24 on February 1 amid expectations that the Budget should address all the challenges that are hurdles before the growth recovery and present a clear road map for fiscal consolidation. Though there is no easy way to cut through it as there is a trade-off between fiscal consolidation and growth recovery.

However, the main focus of the budget must be on the growth recovery of the economy amid global uncertainties and the looming threat of recession. India’s economy is on the path of growth and relatively performing well in FY23 as compared to other advanced and emerging economies of the world. The first advance estimate (FAE) of GDP released by the Ministry of Statistics and Programme Implementation (MoSPI) confirms the same.

The latest data of the MoSPI would be an essential input for the Budget of 2023. According to the FAE, the economy of the country is expected to grow by 7 per cent in FY23. Though the estimated growth is better than expected growth; consumption and investment data show that there should be a promising policy for boosting the growth through investment and a detailed plan for fiscal consolidation through bringing down revenue deficit and expending capital receipts.

Of course, the growth is 170 bps lower than the GDP growth of 8.7 per cent pegged in FY22 and the main reason for this was the base effect that statistically pushed-up the growth in the previous year. Nominal GDP at current prices is estimated at Rs 273.08 lakh crore for the current year against the annual Budget Estimate of Rs 258 lakh crore. The estimated figure is Rs 15.08 lakh crore – 5.85 per cent more than the annual Budget Estimate.

The economy, which contracted by 6.6 per cent in FY21 due to the global pandemic, started a mild recovery from the second quarter of the last fiscal. Now it is gradually growing because of rising demand, especially in the services sector. Nevertheless, our strong economic rebound from the global Covid pandemic is losing steam as a non-satisfactory performance of the manufacturing sector and shrink in export demand.

What does the external demand number say?

A slowdown in export growth due to weak external demand is a matter of disquietude for the government. There has been a sharp distending of net exports that will likely taper the actual number of GDP in FY23. The net export that was Rs 3.97 lakh crore in FY21, surged by 2.3 times and reached to Rs 7.03 lakh crore in FY22. The net export figure of FY22 will be three and half times of FY21 and likely to reach at Rs 11.19 lakh crore in FY23. An expected slower export growth will remain a challenge in FY24 too.  

Mixed signals of consumption

Domestic demand that is symbolised as private final consumption expenditure (PFCE) has shown a gradual improvement. It has grown on average by 7.4 per cent in post-Covid duration and reached to Rs 90.22 lakh crore in FY23 from Rs 83.78 lakh crore in FY22 and Rs 77.64 lakh crore in FY21. However, on the other hand, the performance of the PFCE with reference to the GDP is not satisfactory.

The share of PFCE in the GDP that was 57.3 per cent in FY21 declined to 56.9 per cent in FY22 and further reduced to 57.2 per cent in FY23, might be because of the increased number of the GDP as the denominator has increased from Rs 117.26 lakh crore in FY21 to Rs 157.60 lakh crore in FY23. Manufacturing sector is still a matter of concern. While this sector pegged growth of 9.9 per cent in FY22, the growth declined to 1.6 per cent in FY23. This sector is suffering from high raw material cost, weak external demand and uneven recovery in domestic demand.

The high frequency indicators of consumptions are giving an assorted signal. While the Index of Industrial Production (IIP) for consumer goods remains muffled, other indicators like GST revenue collections, passenger car sales, commercial bank loans, and gold loans are reflecting strong consumption recovery. However, the overall consumption especially rural consumption has been negatively impacted due to higher retail inflation and adverse monsoon.

Though, the first half of the current fiscal showed a steep rise of 17.2 per cent of the GDP in consumption. However, the second half is expected to see a contraction in PFCE due to base effect. The step rise in consumption may be seen in the growth of gross fixed capital formation (GFCF). Investment recorded growth of 11.5 per cent YoY in FY23 due to the government’s push to capital expenditure.  Public investment would be an important factor to crowd-in private investment.

Sector-wise GDP data shows that trade, hotel and transport, the most affected segment during global Covid-19 pandemic period, registered a double-digit growth of 13.7 per cent in FY23 against 11.1 per cent in the corresponding previous year. Electricity, gas water supply and other utility services pegged growth of 9.1 per cent. The ever-green agriculture sector has registered growth of 3.5 per cent.

Focus on what matters most

So, how can we confront these challenges? Let me highlight five priorities that should be part of the forthcoming Budget.

First, in a global economy, we need a strong trade engine. The most important way would be creation of external demand and continuation of the recovery of domestic demand. There should be a promising path for boosting growth through generating demand. Thus the government should maintain the pace of public investment that was initiated in the last fiscal, in this Budget too. The finance minister has also indicated that the government will prioritise urban infrastructure such as metro projects.

Second, the unemployment rate is a serious threat for the recovery of the economy and a crucial component of the creation of demand. Unemployment rate of the country reached a 16-month high at 8.3 per cent in December of last year from 8 per cent in the previous month, as per data of the CMIE released on January 1. So job creation should be on the radar of the forthcoming budget.

Third, the government has announced in the last year’s budget to accomplish a fiscal deficit target of 4.5 per cent of GDP by the fiscal year 2025-26. However, there is no clear road map for it. The government should come out with a detailed plan of fiscal consolidation and reset the target of 3 per cent of GDP as per FRBM act. The Budget Estimate for next year should be 40-50 bps lower than the current year Budget target.

Fourth, the government should focus towards curbing revenue deficit and boosting revenue, for fiscal consolidation and growth recovery, by simplification of direct tax structure, unlocking the value of the unutilised or underutilised public and government assets and speed-up divestment of the central public sector enterprises.

Fifth, the International Monetary Fund (IMF) in its Economic Outlook of 2022 had warned last year that the world economy is going through severe economic challenges. The chief economist of the IMF Pierre-Olivier had said that the second half of the year 2023 will be like a recession and the most affected section will be the vulnerable section. Thus the Budget must be aimed at reducing the cost-of-living pressure.

Dr Vinay K Srivastava teaches at ITS Ghaziabad

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