India’s Union Budget for FY23 will be presented amidst several headwinds emanating from global and domestic factors — some old ones, getting prolonged due to slow global recovery and resurgence of Covid infections, coupled with some new ones.

High commodity prices, global logistics and supply-chain bottlenecks, negative demand shocks particularly in contact-intensive sectors, and the rising spectre of global inflation (which can quickly pass through to domestic inflation) may all affect economic activity, thereby posing tough challenges before the Finance Minister while outlining the fiscal path for the next financial year.

The green shoots of recovery in recent times, and expectations of a short-lived Omicron-led third wave may well help achieve the projected growth of 9.2 per cent in the current fiscal, but significant areas of concern on the aggregate demand and supply-side remain.

Risk of uneven recovery

Subdued private investment, weak capacity utilisation, significant MSME stress along with persistently elevated levels of domestic inflation over the recent quarters pose the risk of a fragile and uneven recovery. Disinvestment continues to be a missing engine on the resource mobilisation side with only 5.2 per cent of the budgeted disinvestment target of ₹1.75-lakh crore being raised in the first half of FY22. Given such risks, uncertainties and constraints the Budget FY23 assumes significance in drawing the path of India’s economic revival.

Interestingly, while Covid-19 has been detrimental in terms of loss of lives and livelihood, it has also forced the policymakers to recalibrate key policy frameworks with a renewed focus on the nature and pace of reforms. In line with the expansionary stance taken in the last Budget, the government must continue to spend more, despite limited headroom for greater expenditure due to the prevailing fiscal slippage.

Greater government expenditure, coupled with a prudent rationalisation of tax slabs targeting the low and middle-income class, can potentially kickstart a virtuous cycle of consumption-led growth in aggregate demand, reverse the employment and income losses inflicted by the pandemic, and crowd-in private investments as demand picks up. Greater economic growth in itself can help improve the tax buoyancy, thus triggering an automatic stabilisation process in managing the fiscal slippage.

The FY23 Budget is expected to increase the outlay in capital expenditures north of 20 per cent. However, what would be critical is the quality of the planned spending — the mistakes committed during the investment boom following the global financial crisis needs to be avoided so that we can abate another cycle of NPA distress. The Budget needs to chart out a targeted spending approach in sectors with high employment elasticity, and those that have been more adversely impacted than others during the pandemic-hit period.

Urban employment

Covid-19 has caused enormous distress to the low-income segments of the society, particularly those at the base of the working-age pyramid and operating in the informal sector, thus deepening and widening the already persistent inequalities in the economy. Such disparities are not only ethically undesirable and socially polarising, but it also has the potential to weaken India’s long-term growth prospects. The upcoming Budget should announce an urban employment guarantee programme, replicating the success of MGNREGS in the rural areas.

Undoubtedly, Atmanirbhar Bharat Abhiyan, with an objective to make India a self-reliant economy, is directionally desired but the means to achieve this through increased protectionism is certainly a regressive step. The Budget should therefore revitalise exports as an external driver of domestic growth and ensure that India is a key participant of the global and emerging regional value chains.

The Budget should synergise the plans of both the Centre and the States to ramp up the recovery process and help achieve the objectives envisaged under the Centre’s key plans like the National Investment Pipeline, National Monetisation Plan and Production-linked Incentives.

On a positive note, FY23 is expected to see some buoyancy in revenue receipts because of higher GST collections and recovery signs evident in a few of the high-frequency macroeconomic indicators (including that of rural demand and services). However, the impending challenges accruing from the protracted nature of the pandemic, particularly affecting the global and domestic demand, may play a spoilsport in generating a net positive impact on growth and fiscal consolidation.

Nandy is an Assistant Professor at IIM Ranchi, and Bindra is an alumnus of the IIM Ranchi