A perfect election Budget
Budget-2023 comes in a very difficult year for the Modi government. It is the last full Budget before the 2024 General Election, and there are several key state elections this year. All this is coming at a time when the global economy is bracing for a recession, and inflation hasn’t completely cooled down. So, the Budget had to be an exercise in defence, a holding operation of sorts.
On the face of it, cutting taxes for the top 5 per cent and the super-rich is a surprising move in an election year, but these are the people who drive public discourse.
That is why most of the government’s Budget estimates are conservative. Look at taxes, for instance; both corporate and income taxes grew at a healthy 17 per cent last year, faster than the 15 per cent growth in nominal GDP (unadjusted for inflation). This year, the government expects direct taxes to grow by just 10.5 per cent, exactly at the same rate as nominal GDP. GST collections are expected to grow by 12 per cent, at a faster clip than GDP, customs to grow by 11 per cent and excise (mostly from petroleum products) to grow by just 6 per cent.
What do these numbers tell us? To understand that we have to first account for the fact that the Finance Minister has increased income tax rebates to the middle class and cut the peak tax rates for the super-rich. The government estimates that this will cause it to lose about Rs 37,000 crore in income tax collections. Without these tax sops, the income tax collection should have grown by over 15 per cent.
About 5 per cent of Indians file IT returns, and even fewer actually come in the tax-paying bracket. If tax rates had remained unchanged, taxpayers’ would have paid 15 per cent more in income tax in 2023-24. This suggests that the government expects the top 5 per cent of Indians to earn about 15 per cent more this year, in nominal terms. This is much higher than the 10.5 per cent expected growth in national income. In other words, the government expects the top 5 per cent to get a larger share of the total income pie.
On the face of it, cutting taxes for the top 5 per cent and the super-rich is a surprising move in an election year. But these are the people who make up the chattering classes and drive public discourse. The Modi government understands that it is important to keep them happy so that public opinion stays firmly behind it. In fact, the conservative corporate tax estimates suggest that the government expects corporate profit growth to slow down. This will have an impact on professionals at top management levels in India Inc, who are likely to see a reduction in their bonuses. The sharp cut in peak tax rate, by slashing the surcharge from 37 per cent to 25 per cent, ensures that their post-tax incomes will not be affected too much by an economic slowdown.
The government also expects the organised sector to capture more of the market for goods and services. This is the only reason why GST collections grew much faster than GDP last year, and is expected to grow at a faster pace in 2023-24 as well. On the other side, the unorganised sector, which is largely outside the GST regime, is fast losing ground, which is also showing up in high unemployment numbers. The government does not see this segment as a factor in electoral politics – by definition it is ‘unorganised’ and cannot offer a unified platform for any political party.
The government clearly believes that it has to tackle unemployment in this last year before the elections. So, it has increased capital expenditure by Rs 2.7 lakh crore or about 0.9 per cent of nominal GDP. Out of this, 30 per cent will go to boosting railway infrastructure, 19 per cent will go to building more roads and highways, and another 19 per cent will be transferred to states as interest-free loans to be spent on building infrastructure. All of these will provide temporary, low-quality jobs to the poor, which will boost their incomes. This is over and above the government’s free food scheme, which covers 80 crore people, which has been extended till the end of 2023. It should not surprise anyone, if the government extends that till the summer of 2024, when it goes back for re-election.
Budget 2023 is also aimed at pleasing a key constituency in contemporary politics – finance capital. So, the Finance Minister has committed to cutting the fiscal deficit down to 5.9 per cent of GDP. Global finance likes to see governments committing themselves to fiscal prudence, even if it just an accounting exercise. The equity markets like it, too, because they believe that low fiscal deficits keep inflation and interest rates in check.
Hardly anyone cares whether the fiscal deficit target can actually be met. This year, for instance, the fiscal deficit figure has been kept down by cutting down on subsidies. Food, fertiliser and petroleum subsidies together made up about Rs.5.2 lakh crore in 2022-23; this year they are expected to cost just
Rs 3.7 lakh crore. This is unlikely to be achieved, given that the free food schemes are continuing like last year, and the government will find it difficult to increase fertiliser prices in an election-heavy year. On top of that, an ambitious disinvestment target has been set once again, despite the government’s inability to meet any of its past divestment goals.
The Budget is a carefully calibrated election Budget, which tries to please all the groups which matter in elections — the top 5 per cent, the poor and finance capital.
The author is a senior economic analyst
