From capex to taxation, four things to look out for in Union Budget 2023

This is the last full budget before the 2024 Lok Sabha elections, and will be tabled amidst a global slowdown and unprecedented geopolitical uncertainty

On Wednesday, February 1, Finance Minister Nirmala Sitharaman will rise to present the Union Budget for financial year 2023-24. Much has been written and said about what the Budget could contain, over the last few months. It is, after all, the last full budget before the 2024 Lok Sabha elections, and will be tabled amidst a global slowdown and unprecedented geopolitical uncertainty.

Here are the four things you can look for in the budget.

Infrastructure and capital expenditure

Expect Sitharaman to continue the thrust on massive public investment in infrastructure. The Narendra Modi government is of the firm belief that the best way to sustain India’s growth, create more jobs and boost consumption is through high multiplier capital expenditure.

There is expected to be a substantial increase in the centre’s capex outlay in FY24, though not as much as FY23 and FY22, as policymakers are of the view that private sector capex is improving after two muted years due to the Covid-19 pandemic. Still, the centre’s capex budget estimate (BE) could exceed Rs 9 trillion compared with this year’s Rs 7.5 trillion, and the centre will continue with long-term, interest free loan to states for their capex needs.

In line with the thrust on the Prime Minister Gati Shakti-National Master Plan, the government will prioritise and fast-track as many as 18 critical road infrastructure projects in the financial year 2023-24. There will be announcements on multi-modal logistics, ports and railways as well, as part of PM Gati Shakti.

Tax collections

On the revenue front, the government likely to keep its ambition for growth in direct taxes moderate for FY24, after buoyant tax receipts in FY23 and FY22. This is primarily due to a high base effect and the fact that recession in developed economies will impact India’s trade and hence tax collections. For FY23, the government expects direct taxes to be revised upward as it is likely to substantially exceed the BE of FY23 by at least Rs 1-1.5 trillion.

Sources say the BE for FY24 is looking at pegging 12-14 per cent growth in direct taxes for FY24 over Rs 14.2 trillion BE of FY23.

Policymakers may tweak the two-year-old alternative personal income tax regime to make it attractive. At present, taxpayers don’t pay income tax if their taxable income is Rs 2.5 lakh and below. Increasing the threshold will reduce the tax outgo for assesses, thereby leaving more money with them to invest.

Currently, very few taxpayers have opted for the alternative tax regime. For many, the tax outgo in the older personal income-tax regime is lower if they make use of deductions such as under Section 80C and Section 80D.

The Budget may also announce increasing custom duty on at least 40 items including private jets, high-end electronics, jewellery, etc.

Social Sector

On the education front, while there will be an increase in absolute terms, new initiatives may not be likely. The biggest announcement in the 2022 budget was setting up of digital universities and the focus of the centre remains getting the states on-board the National Education Policy.

On health, the industry is seeking further tax rationalisation for diagnostics, standardisation of some medical tests and more funds for mental health. In social sector, there could be further push for providing last mile water connectivity through Nal se Jal programme.

The look back at previous budgets throws up some interesting trends. One would assume that the Covid-19 pandemic led to a huge bump in health and social welfare budgets. That has not proven to be the case.

Fiscal Consolidation

The Finance Ministry is likely to stick to its internal fiscal consolidation roadmap and the 2023 Union Budget may target a fiscal deficit of between 5.5-6 per cent of nominal gross domestic product (GDP) in FY24. The roadmap aims for a fiscal deficit target of 4.5 per cent of GDP by 2025-26.

“While the government has its internal consolidation roadmap, there could still be deviations. Most developed economies are heading for a recession, there is geopolitical uncertainty due to the war in Europe, and inflationary pressures still persist. All of this could impact revenue collections and expenditure commitments in FY24,” said a senior government official.

Fiscal deficit is the difference between a government’s expenditure and revenues when the former is higher.

With the Indian economy still expected to be on a relatively strong footing, officials expect another year of healthy direct tax collections in FY24. However, global headwinds will continue to weigh in. According to the International Monetary Fund (IMF) in its latest World Economic Outlook, a third of the global economy is expected to slip into recession in calendar year 2023. This will include many of India’s biggest trading partners in the West.

Officials say that the slowdown may affect manufacturing and other related sectors, and hence policymakers will have to remain vigilant.

On the expenditure front, budget makers are bracing for another year of high spending commitments for flagship welfare and subsidy schemes. However, the expectation is that the ongoing exercise to curb non-priority spending is going to lead to greater savings in the coming year.