Budget 2023: The FM’s inflation-growth dilemma

In a time when both the local and global economies are far from favourable, Finance Minister Nirmala Sitharaman has the challenging duty of preparing the budget. In 2023, the IMF predicts that global economic growth will be only 2.7%, down from 3.2% in 2022 and 6.1% in 2021. The US is on the verge of entering a recession as are one-third of the global economy and half of Europe. China is projected to see a remarkable slowdown as a result of the pandemic gripping its major production hubs. In order to combat inflation, interest rates in the West have sharply increased, yet this has simply fueled the fire.When compared to other large nations, India’s predicted FY23 growth of 7% appears strong; nevertheless, this is primarily because the economy has recovered from the weak starting point in the first two quarters of FY22. According to the RBI, GDP growth will only be 4.3% in the second half of FY23 and 6% the following year. Increasing investment is essential to accelerating growth, and the public sector must take the initiative in this regard. Even if indicators like the PMI for services and manufacturing reached a 27-month high of 57.8 in December, and even though the PMI for services increased from the previous month’s (56.4) low to 58.3 in December, it is still too soon to interpret these numbers as a trend.In her budget address for 2021u201322, the finance minister made a commitment to reduce the fiscal deficit to 4.5% by 2025u201326. Assuming that the government will keep the deficit at the planned 6.4% in 2022u20132023, there will need to be a reduction of 1.9 percentage points over the next three years. A significant portion of that reduction needs to be made in the upcoming budget because the demands of electoral politics may prevent it from being done the following year. The budget would have to cut the fiscal deficit to 5.8% next year in order to maintain the essential compression.Video Courtesy : Business Standard
The first advanced estimate’s nominal GDP estimate offers some wiggle room. The nominal GDP, which was expected in the budget to be Rs. 258 lakh crore, is now estimated to be Rs. 273.08 lakh crore. The nominal fiscal deficit will amount to 6.08 percent of GDP if it is kept to the budget estimate of Rs 16.6 lakh crore. In other words, a cushion of Rs 86,500 crore is provided by the latest GDP estimate. However, budgeted spending has exceeded actual spending by an estimated Rs. 3.36 lakh crore.
The increase in food subsidies was brought on by the increased foodgrains distributed under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), whereas the rise in fertiliser subsidies was brought on by inputs.  least Rs 5000 crore will be saved if additional foodgrain allocations under PMGKAY were stopped. The government appears to have made significant savings thanks to the establishment of a single national agency to administer Centrally Sponsored Schemes (CSS), and those savings will continue to pay off in the years to come. Although the CSS needs to be consolidated and undergo design change, this is not expected to happen this year.Some significant reform-related initiatives are anticipated in this budget. As off-budget liabilities have been eliminated during the past few years, there has been more openness. A number of recommendations have been made by the 15th Finance Commission under the heading Fiscal architecture for the 21st Century: As part of a fiscal rule-based policy, it is important to I have credible fiscal rules, (ii) implement a public finance management system to provide thorough, consistent, reliable, and timely reporting of fiscal indicators, and (iii) establish an independent fiscal assessment mechanism to offer assistance and advice on how the fiscal rules and public finance management system should be implemented.Additionally, it is intended that efforts will continue phasing out deductions and concessions and lowering rates in an effort to make the tax system transparent and straightforward. It is not required to use more brackets while doing this. Importantly, the protectionist strategy implemented since 2017 must be reversed while maintaining a long-term perspective on competitiveness and growth.Will the FM go for aggressive fiscal deficit reduction in Budget 2023 or will she go for a moderate fiscal consolidation?Share your views in the comment section below.