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Mainstream, VOL 61 No 6, February 4, 2023

Challenges and Policy Options for Budget 2023-24 | Atul Sarma & Shyam Sunder

Saturday 4 February 2023


by Atul Sarma & Shyam Sunder *

Budget 2023-24 is expected to be prepared under the shadow of multiple challenges such as slowing global growth, elevated core inflation even with tamed energy and food prices, and looming recession in Europe and other advanced countries. At another level, this being the last full budget before the general election in 2024 has its own challenges to make it as voter friendly as possible.

The performance of the Indian economy in the immediate past would cast its long shadow on budget preparation. Indian economy contracted by 7.3% in the Covid-19 ravaged year of 2020-21. However, the economy was in a downward swing even prior to the pandemic. Demonetisation announced on November. 08, 2016, sudden nation-wide lock-down implemented from March 23, 2020, displacing an estimated 30 million urban migrant labour, implementation of faulty designed GST since July 01, 2021 had all hit hard the informal sector-the sector which accounts for about half of India’s GDP and more than 90% of employment. As a result, the GDP growth witnessed a secular decline from 8.26% in 2016-17 to 6.80% in 2017-18, 6.53% in 2018-19 and 4.04% in the pre-pandemic year, 2019-20.

Even so, the Indian economy has displayed resilience by way of recovering real GDP growth to 8.7% in the fiscal 2021-22 even if it was just 1.5% higher than the real GDP of 2019-20. Nevertheless, India was one of the fastest growing economy among the large economies.

Other macro indicators were also depressing: The pandemic pushed a large number of people into poverty; unemployment shot up; inflation soared, fiscal deficit increased, domestic consumption, the major driver of growth shrank, export growth slumped, and current account deficit climbed up.

Several global factors such as Russo-Ukraine war, China’s zero Covid policy disrupted supply chain impacting India’s domestic production; Federal Reserve’s policy hike to contain high inflation led to capital outflow. That forced the Reserve Bank of India (RBI) to raise interest rate as also exchange rate depreciation. Slowing global growth reduced demand for our export while high energy prices together with high exchange rate adversely affected our reserve adversely impacting current account balance and rising prices. However, large remittances exceeding $100 billion was a redeeming feature. On the top of all that, climate change, another global factor threatening life and livelihood of the people demanded government action.

To protect the poor from hunger, free food was provided. To boost private investment, corporate tax was drastically cut even if it cost the exchequer to the tune of ₹1.40 lakh crore; Atmanirbhar Bharat initiatives, Production Linked Incentives (PLI) schemes and several other reforms were introduced to boost investment. Some policies to help the informal sector were also put in place. Budget 2022-23 provided for large capital expenditure with thrust on strengthening infrastructure for connectivity and logistics. The RBI hiked interest four times to tame two-digit high inflation.

However, most of these policy actions acted on supply side. Even so, private investment was rather shy, not moving up to the desired extent. The reason is that the economy is highly aggregate demand deficient. Such situation does not encourage private producers to create new capacity. Even with some rise in aggregate demand in the post-pandemic years, Indian industries have more than a quarter of their capacity unutilised.

Aggregate demand deficiency is in the country’s current context understandable. Twenty-five per cent of India’s population are multi-dimensionally poor with little purchasing power (NITI Aayog, (Multidimensional Poverty Index, Baseline Report 2021). In fact, as recently as December 23, 2022, the Government of India has made food grain free for 81 crore people or more than half of the country’s population under National Food Security Act (NFSA) for one year (January to December, 2023). High inflation and costly private health and education services have eroded the purchasing power of the middle-class population (defined as those with an annual income of ₹5-30 lakh) comprising 30% of all households in 2020-21 (survey data of PRICE, an independent Think tank). The top class whose income rose, demands more capital-intensive goods and imported ones which do not contribute much to the aggregate demand growth.

The Institute for Competitiveness in its State of Inequality in India report observes: “The top 0.1% has been found to account for 5-7% of the national income”. It also finds that 90% of Indians do not earn even ₹25000 per month. Further, a national survey on incomes by PRICE finds that all- India average household income rose by 8 per cent between 2016 and 2021. But the poorest 20% of households suffered an income loss by 53% while the top 20 % gained by 39% between these two years. In a state of such worsening income distribution, persistent effective demand deficiency is a natural outcome.

Policy making in 2023 could be more challenging in view of uncertainties emanating from the prolonged war, elevated core inflation which spreads across a large number of sectors, looming recession in the EU which would curb outsource of IT services from Indian T sector and slower global growth below 2%. In short, 2023 will face a number of ‘known unknowns’. That is what would make budget preparation very challenging.

A judicious combination of monetary policy and fiscal policy will be needed to take back the economy to its potential growth path. There are two options. Monetary policy could be hawkish in terms of monetary tightening to break the back of inflation and current accounts. But that would adversely impact growth. Or it could be dovish by going slow in monetary tightening thereby encouraging investment and growth. But that would risk elevated inflation.

Fiscal policy could continue to focus on fiscal consolidation and on supply side measures which would augment growth in the medium to long term. But that would risk slow growth in the short run. Alternatively, it could go slow on fiscal consolidation and take measures to boost aggregate demand that would encourage investors to invest for creating new capacity. In short, right balancing of monetary and fiscal policies would be a way forward.

In specific terms, Budget 2023-24 should restrain itself in providing any freebies as lure to voters. While it should continue its effort for consolidate fiscal, revenue budget balancing should receive higher priority. Last eight years have witnessed little attempt for fiscal reforms apart from GST introduction which is of course a very major reform. However, its design needs a close review to realize its full potential. As for direct taxes, the draft direct tax code which gathered dust should be resurrected and implemented. The tax on the earnings of the super-rich should be raised. Given the erosion of the purchasing power of the middle class, tax relief of some sort should be considered. Considering its demonetization and lockdown battered past and its contribution to income and employment generation, MSME deserves appropriate incentives for its resurrection.

Currently, the PLI scheme covers 14 sectors and aims to boost domestic manufacturing and exports. The Union Budget 2023-24 should consider extending the PLI scheme to more labour-intensive sectors such as the leather, toys, glassware and furniture industry to generate employment opportunities.

During the national lockdown, Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) was instrumental in cushioning the impact of Covid-induced job losses. It provided jobs to reverse migrant labourers. Higher demand for work under MGNREGA led the government to seek more funds for the scheme under the supplementary demand for grants. The government must consider maintaining the budget allocation for MGNREGA to ensure adequate employment generation for rural households.

In the post Covid-19 world and under current global uncertainties, there is a need to lay down a clear roadmap for India’s future development. To conclude, Budget 2023-24 would require to address the challenges including the global ones while at the same time to bring back the Indian economy to its potential growth path.

* (Authors: Atul Sarma (sarmaatul[at] is Former Head and Professor of Economics, Indian Statistical Institute, Delhi Centre, and Shyam Sunder ([at] is working with an Indian Corporate. Views are personal.)

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