The Budget is strongly supportive of a demand-led growth. Private final consumption expenditure is supported by an increase in disposable incomes, especially of the lower middle-income groups through tax slab adjustments. A reduction in CPI inflation will also add to disposable real incomes. Lower global crude prices would also translate into lowering of energy costs for households, releasing incomes for augmenting expenditure on non-energy products.

In regard to capital expenditure, the Central Government has directly increased its budgeted capital expenditure by 37.4 per cent. It has also incentivised capital expenditure through the State governments by increasing their overall fiscal deficit limit to 3.5 per cent of GSDP and by giving them grants meant for capital asset creation. As the fiscal year evolves, private investment may also be boosted by a resumption of an interest rate reduction cycle after a further fall in inflation.

It comes therefore as a surprise that the Budget has assumed a nominal GDP growth of only 10.5 per cent for 2023-24. In 2022-23, according to NSO’s First Advance Estimates, nominal GDP growth is estimated at 15.4 per cent which may be decomposed into a real growth of 7 per cent and an implicit price deflator (IPD)-based inflation of 7.9 per cent. The ongoing trends indicate a downward movement of both CPI and WPI inflation. According to the RBI, CPI inflation is likely to average 5.2 per cent in the first half of 2023-24. WPI inflation may also be close to this. The RBI’s Professional Forecaster’s Survey projects a CPI inflation of 5.2 per cent and a WPI inflation of 4.8 per cent for the full year of 2023-24. It is therefore likely that the IPD-based inflation would be close to 5 per cent. Using this, the implied real growth in the budgeted nominal growth assumption of 10.5 per cent is only 5.2 per cent.

Thus, the Budget signals a fall of 1.8 per cent points in the real growth rate and of nearly 5 per cent points in the nominal growth rate. It is paradoxical that while strongly supporting domestic demand, real growth is expected to fall by close to 2 per cent points.

This further implies that the Budget expects a significant increase in the magnitude of the negative contribution of net exports which is estimated at (-)2.8 per cent points in 2022-23. In fact, as far as the Indian economy is concerned, a fall in global crude prices would be beneficial and may neutralize some of the adverse impact of the likely fall in global demand on India’s exports.

Reaching a level of fiscal deficit of 4.5 per cent of GDP in 2025-26 from the budgeted level of 5.9 per cent in 2023-24 would call for a reduction of 0.7 per cent points in the next two years. This implies a steeper reduction path. However, the Government does not indicate either the timeline or the commitment to reach back the FRBM level of 3 per cent of GDP.

One positive feature of the Budget is the clear restructuring of expenditure in favour of capital expenditure. In fact, revenue expenditure is budgeted to grow only by 1.2 per cent while the government’s capital expenditure is budgeted to grow by 37.4 per cent in 2023-24. The reduction in revenue expenditure growth may however be temporary. It is predicated largely on a fall in the overall subsidy expenditures which may itself be linked to an anticipated fall in the global crude and commodity prices. A reduction in pension expenditure has also been budgeted.

Transfer to States

As noted earlier, States’ fiscal deficit limit has been increased to 3.5 per cent of their GSDP and grants for capital asset creation amounting to 1.2 per cent of GDP have also been given to the States. In addition, an interest-free loan for 50 years is extended to the State governments for capital expenditures in 2023-24. States’ share in the Centre’s gross tax revenues is pegged at 30.4 per cent in 2023-24. This is significantly less than the share of 41 per cent as recommended by the 15th Finance Commission, implying that the divisible pool is getting reduced by an inordinately large share of non-shareable cesses and surcharges.

The consolidated fiscal deficit of the Central and State governments may amount to 9.4 per cent of GDP consisting of 5.9 per cent for the Centre and 3.5 per cent for the States. This is still quite high. Assuming household financial savings at close to 8 per cent of GDP, and the current account deficit at 3 per cent of GDP, the total investible resources may be estimated at 11 per cent for 2023-24. For facilitating interest rate reduction, the government’s draft on available investible resources requires to be reduced further.

The writer is Chief Policy Advisor, EY India. Views expressed are personal