The Union Budget 2023-24 was presented at a time when domestic growth drivers were reviving while global uncertainty continued to be high. At such a juncture, the Budget was expected to articulate a growth strategy, which it did. The finance minister focused on driving up public capital expenditure (capex) and prudent fiscal management to revive domestic demand. And while doing so, the Budget continued to retain its focus on inclusion and addressed social priorities to bring prosperity to the masses.
The focus on capex has been high in the last few Budgets, especially in infrastructure. The significant increase in outlay in a wide range of areas, such as roads, rail, airports and heliports is expected to have a multiplier effect on growth, help crowd in private investments, which have seen incipient signs of recovery, and create jobs. The budgeted capex was increased steeply to about 3.3% of the Gross Domestic Product (GDP) in FY24, as compared to the long-term average of 1.7% of GDP (FY09-FY20). This has translated into an improvement in the quality of spending, as mirrored by the reduction in the ratio of revenue expenditure to capital expenditure to 3.5% in FY24 from the pre-pandemic average of 6.5%. The focus on improving the quality of government spending will ensure that adequate resources are available to meet the nation’s developmental needs.
The Budget did well to announce a gamut of measures to encourage investment by sub-national entities and in the ancillary sectors. The nudge to states to undertake capex and link it to the power sector will hopefully encourage states to undertake responsible spending. The increased outlay on affordable housing is another welcome development.
Overall, the Budget has given requisite impetus to public investment. However, public investment alone is not enough to revive the investment cycle; it can, at best, be an important enabler for laying the ground for private sector investments to gain traction. It is encouraging to note that the recovery in private sector investments is slowly, but steadily, gaining steam, with capacity utilisation having crossed trend levels in several industries. As per the Confederation of Indian Industry’s latest Business Outlook Survey, almost all respondents expect recovery in the private investment cycle during FY24. The prognosis on private investments can be improved further by reviving the languishing public-private partnerships (PPPs) in infrastructure. The newly set up infrastructure finance secretariat in the ministry of finance should be used to address the bottlenecks for reviving PPPs in infrastructure.
Urban infrastructure financing is another important area that needs attention. A recent World Bank report estimates that India will need to invest $840 billion over the next 15 years in urban infrastructure to meet the needs of its growing urban population. In this regard, the Budget announcement to encourage cities to initiate urban reforms to improve credit worthiness for municipal bonds for channelising finance for urban infrastructure can go a long way. Investments in the economy can get a further leg-up if the performance and competitiveness of the manufacturing sector is bolstered. The Budget announcements pertaining to the reduction of duty on certain products for key sectors, such as electronics, chemicals and capital goods will reduce the cost of doing business, thus boosting the sector’s competitiveness.
It is clear that India is thinking big on manufacturing. To sustain this momentum, the government could consider extending the deadline for lower corporate tax for new manufacturing units by another one to two years, given the fact that almost two years were lost to the pandemic. In addition, the extension of production-linked incentives to some of the labour-intensive manufacturing sectors, such as leather and footwear, toys and apparel will be helpful as well. Both these suggestions could be implemented over time, outside the purview of the Budget announcements.
It is reassuring to note that the rise in capex is expected to be achieved by staying within the ambit of fiscal consolidation. This is a good sign as fiscal discipline will provide a big boost for private investment by lowering the interest rates in the economy.