Budget 2023: A Balancing Act of Fiscal Policy

Achievement of fiscal deficit target should be paid a careful attention as there has been a rise in expenditure largely on account of higher subsidy bills and additional measures announced by the GoI.

Budget 2023, Budget Expectations, Union Budget
Despite being a more sustainable alternative for growth, consumption-led economic growth has ramifications for the inflationary pressures ahead.

By Chinmay Joshi

Economies world-over are grappling with multiple menaces such as threat of upcoming recession, persistence of inflationary pressures, supply chain bottlenecks caused by Russia-Ukraine war, aftershocks of Covid-19 pandemic and rising unemployment levels manifested in terms of recent layoffs by technology firms among others. Indian economy is not an exception to it. Against this bleak as well as challenging backdrop, on February 1, 2023, Finance Minister (FM) of India, Mrs. Nirmala Sitharaman will present her fifth Union Budget of India for the year 2023-24. It is widely expected that this budget will be prepared keeping in the mind the general elections scheduled in 2024 as this will be the last full budget of current government.

Fiscal deficit as per the Budget Estimates (BE) of 2022-23 is expected to be at 6.4%. As per the Controller General of Accounts (CGA) data, India’s fiscal deficit for the April-November period for this financial year widened to 58.9% of the Budget Estimates of 2022-23. Fiscal deficit showed an increasing trend as compared to the same period in the previous year where it stood at 46.2%. On the growth front, nominal GDP growth of 15.4% as estimated by the First Advanced Estimates (FAE) released by the MOSPI, Government of India (GoI), on January 06, 2023, is expected to exhibit a declining trend as compared to previous year which recorded a growth of 19.5%. Against this backdrop, achievement of fiscal deficit target should be paid a careful attention as there has been a rise in expenditure largely on account of higher subsidy bills and additional measures announced by the GoI.

Increasing government expenditure has the potential to crowd out the private investment through higher government borrowings. It will not only crowd out the private investment but will also lead to higher fiscal deficit causing higher debt and increase in primary deficit.  Possibilities are also high that a country may find itself in a vicious cycle of deficit and debt. Therefore, private players should be encouraged in sharing the responsibility in capital expenditure rather than depending predominantly on government expenditure in order to reduce the excessive dependence on government resources.

Rising fiscal deficit can be addressed reasonably if government manages to increase its tax and non-tax revenues. As per the CGA data, the increase in the revenue has come predominantly from increase in non-debt capital receipt, recovery of loans and other receipts of which major contributor was disinvestment proceeds. However, revenue generation from disinvestment proceeds has its own limitations. Besides, it should be noted that the target set for disinvestment proceeds for the financial year 2022-23 is much lower than the targets set in previous two years’ budget estimates.

As a result, it becomes imperative on the government to increase its revenue receipts or reduce revenue expenditure in order to make available more fiscal space for the capital expenditure which is employment generating and thereby growth inducing. Since, the revenue expenditure can’t be done away with, possible recourse available for the government is to increase the revenue receipts through tax and non-tax revenues. Despite the robust direct tax revenues during this fiscal year until now, the same trend is difficult to maintain in the upcoming period due to global headwinds and expected decline in the nominal growth rate of GDP. Large component of the indirect tax revenue comes from the goods and services tax (GST). However, it is to be noted that the recent higher GST collection has been mainly due to higher level of inflation in the past few months and not because of rise in consumption demand in the country. This has also been corroborated by the FAE estimates where the growth rate of Private Final Consumption Expenditure (PFCE) is expected to decline. Besides, consumption demand is also conditioned upon how well we can mitigate the impact of upcoming global recession which is expected to hit in the year 2023.

Against this backdrop, in the upcoming budget, the fiscal policy should strive to ensure that the private consumption demand will get a boost which is expected to slow down. Boosting private consumption demand will certainly help in maintaining and sustaining the indirect tax collection in the form of GST in real terms which will further give some more fiscal space needed for the government to boost falling growth rate of capital formation. Attention should also be paid to exports which are expected to rise less than imports implying higher imports are increasingly being used for the consumption. Going by the economic activity from the supply side, sectors such as Mining and Quarrying, Manufacturing and Construction need to be paid adequate attention as these sectors are employment generating.

Despite of being more sustainable alternative for growth, consumption led economic growth has ramification for the inflationary pressures going ahead. However, RBI, in its past monetary policy resolutions, has been steadfast in handling the rising threats of inflationary pressures through successfully anchoring inflation expectations. RBI, in its MPC resolution released on December 07, 2022, predicted that the headline inflation will remain at 5.0% and 5.4% in Q1 of 2023-24 and Q2 of 2023-24 respectively. This has also been accentuated by the recent declining trend showed by headline inflation print where the Consumer Price Index – Combined (CPI-C) reduced from 7.79% in April 2022 to 5.72% in December 2022 whereas the Wholesale Price Index (WPI) also decelerated from the level of 16.63% in May 2022 to 4.95% in December 2022.

With such a robust support from the RBI, fiscal policymakers will certainly get a required opportunity to address the pressing issues before the economy through fiscal policy in the ensuing period of uncertainty and gloom. Notwithstanding, the question arises here is that – will the fiscal policy presented through the upcoming budget, support the sustainable economic growth by shifting the aggregate demand as well as aggregate supply curve to the right without having any adverse ramifications for the price level?

(Chinmay Joshi, academic associate, Bhavan’s SPJIMR. The views expressed in the article are of the author and do not reflect the official position or policy of

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

First published on: 01-02-2023 at 02:30 IST