Finance minister Nirmala Sitharaman will present her final Budget on 1 February before the general elections in 2024. Like every year, industry associations, trade bodies, consultants, and chartered accountants represent the government regarding their expectations from the Budget.
In a recent address to FICCI, an industry body, the finance minister said that the Budget would follow the spirit of previous budgets to prepare India for the next 25 years. That could mean more government spending on physical and social infrastructure.
Over the years, the budget-making exercise has been considered the government’s presentation of the state of the economy. Much excitement is diminished as taxes on consumption items are not determined in the Budget. The implementation of the goods and services tax means the GST council decides the rates on items of daily use. The Budget matters for your taxes, though. It also matters for policy statements announced for various industries.
Any support given to agriculture, roads, infrastructure, and financial services sectors affects the growth prospects of businesses. A change in tax rates for corporates or individuals affects consumption patterns in the economy. If tax rates are cut, you get more money in your hands for spending. That creates demand for goods and services and drives consumption-led growth.
A key thing to watch out for in the Budget is the inflationary pressure it puts on the economy. Prospects for your money depend on the way the government finances are managed. You may be surprised, but if the government does not do that job right, you could see inflation soaring and interest rates rising. That happens when the government spends more than expected on revenue and capital expenditure. A higher fiscal deficit than estimated leads to a higher market borrowing from the government. That puts pressure on interest rates and stokes inflation.
The government in 2022-23 has extended the free food programme, which is likely to impact the overall government expenditure. According to the latest RBI Bulletin, the direct and indirect tax revenues are higher than expected and are likely to help the government meet the additional expenditure. You need to watch out for any excesses in expenditure that could add to the inflationary pressure.
The Budget also needs to provide more for creating export competitiveness. Higher oil imports and other commodities resulted in a higher current account deficit. When imports are significantly higher than exports, the rupee value depreciates, putting inflationary pressure on the economy. While currency depreciation makes exports competitive, it also increases imports’ prices. There is a good chance that the government may put additional import duties on gold and high-value consumer items like smartphones and other electronics. Any fear of higher inflation would ensure that interest rates remain firm.
The RBI Monetary Policy committee will watch out for the Budget 2023 announcement before determining the policy rates in the first week of February 2023. The government’s commitment to structurally bring down the fiscal deficit would be watched closely. Ahead of the election, there is a tendency to offer freebies to attract votes. Since it is the last Budget of the term, you may have to watch out for any such move that adds to the government expenditure.
The Reserve Bank of India projects a growth rate of close to 7% for the following year. International lending institutions like the World Bank Group and the International Monetary Fund expect a slightly lower growth rate. That means businesses that depend on India’s growth would continue to generate business and profits in line with that growth.
Equity markets are at a record high and are likely to stay put due to a strong flow from systematic investment plans. Foreign portfolio investors may not invest much in 2023 as they have relatively cheaper equity assets elsewhere. It would be best if you watched out for statements in the Budget 2023 that support future economic growth. Any projections highlighting a higher fiscal deficit without adequate spending on infrastructure is bad news for equity assets. On the other hand, if the finance minister announces a new capital expenditure programme with no significant increase in the fiscal deficit, that is good news for stock markets.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)