Math Of Budget 2023: Increase In Taxes To Fund Higher Capex And IT Breaks For Middle Class

Nirmala Sitharaman focussed on higher capital outlay as a means to foster growth amidst global headwinds, while at the same time providing tax relief to lower middle class

The government spending is one of the few levers working in the economy as of now and we might see an increase in revenue expenditure especially given its an election year.

Source : Canva

Finance Minister Nirmala Seetharaman on Wednesday presented Modi government’s 9th full Budget and last before the general elections next year. In a longer-than-usual Budget speech, the minister focussed on higher capital outlay as a means to foster growth amidst global headwinds, while at the same time providing tax relief to lower middle class.

Higher capex is likely to kick in a multiplier effect on the economy creating jobs, boosting demand, and resulting in fresh investments. The markets ended up marginally in the red (Nifty50 down 0.26%). 

Revenues are projected to be higher, capped higher, borrowings and fiscal deficit almost flat. Now let us try to understand the math behind the Budget.

Source: Budget Document

• The tax revenues are expected to increase by 11.7% in FY 2023-24 to Rs. 23.3 lakh crore. While Corporation tax (CIT) and personal income tax (PIT) is expected to increase by 10.4%, GST collections are expected to increase by 11.9%. 
• All these three pegs - CIT, PIT, and GST - are expected to be 1/3rd each of the total tax revenues. The total receipts of GoI are expected to be  Rs. 45.03 lakh crore, an increase of 7.55% in FY 2023-24.
• On the expenditure side, total expenditure is expected to increase by 7.55% to Rs. 45.03 lakh crore. However, revenue expenditure is reducing by 3.77% at Rs. 24.23 lakh crore. Capital expenditure on the other hand is expected to increase by 37.36% to Rs. 10 lakh crore, 4x compared to FY 2015-16.
• This means that almost the entire increase in receipts of Rs. 3.16 lakh crore is going to fund the capex (Rs. 2.72 lakh crore). 86% of increase in receipts is being used to fund capex while the balance is being used to fund the increase in interest payments due to a mix of slight increase in borrowings and higher interest rate scenario. 
• Capex includes building roads, airports, bridges and tends to kick in multiplier effect on economy, from that perspective it is good as it leads to creation of long-term assets the benefits of which accrue over many years. Revenue expenditure includes amount spent on various ministries, social welfare programs like NREGA, food/fertiliser subsidy, education, healthcare etc.
• At a time when rural economy is still recovering, and in an election year, this is not a wise move to make. In the previous year revenue expenditure witnessed an increase of 5%. 

A deep dive shows the following: 

Source: Budget Document

• The NREGA allocation is down by about 33% to Rs.60,000 crore. This was increased to Rs. 1.1 lakh crore in COVID year to negate the impact of migrant crisis. However, allocation has fallen even below pre-COVID level of Rs. 73,000 crore. Given that rural unemployment is still high, this decline appears to be too high. 
• Similarly both fertiliser subsidy and food subsidy allocation have been reduced by 22% and 31% respectively; together by Rs. 1.4 lakh crore.
• Allocation to agriculture, education, health and Jal Jeevan Mission have increased by 10% to 27% which augurs well for the rural economy but total increase is only Rs. 0.48 lakh crore and doesn’t compensate Rs. 1.85 lakh crore reduction in pension, NREGA, subsidy and rural development allocation. 
• Resultantly, the borrowings are expected to increase by less than 2% to Rs. 17.86 lakh crore, only Rs. 31,000 more than last year maintaining a tight fiscal discipline.

As we have seen in the past Budgets, slippages do occur quite frequently. Any laxity in tax collections would make the estimates go wrong. The revenue expenditure budget estimate for previous year was flat at Rs 32 lakh crore (including interest) but the actual amount spent was Rs 34.58 lakh crore in revised estimates. 

The government spending is one of the few levers working in the economy as of now and we might see an increase in revenue expenditure especially given its an election year.

That said, the finance minister faced extraordinary challenges of balancing growth and fiscal deficit. She has stuck to the roadmap to reduce fiscal deficit to 4.5% of GDP by FY25-26 which should please the rating agencies, at the same time giving growth a push.

She has not fallen prey to the demands of an excessive populism, income tax breaks, were long overdue and will not incur significant loss to government revenue, only Rs 35,000 crore less than 1% of total receipts. 

Amitabh Tiwari is a SEBI Registered Investment Advisor.

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