Union Budget 2023: Before Polls, Can Govt Push Private Sector To Boost Spending?

India needs a higher growth path and matching jobs that require a Capex pump-up with minimum stress on the budget.

5 min read
Hindi Female

(This is part 2 of our series and special coverage of the upcoming Union Budget, 2023)

If there is a self-help book called How To Eat The Cake And Have It Too, you may want to gift it to Finance Minister Nirmala Sitharaman who could do with some tips and tricks as she heads to present the Union budget for 2023-24 under difficult conditions in which she has to make things work on all fronts.

Picture her like a batswoman in a one-day match where six wickets have fallen, five overs to go, and 80 runs to score for victory. With general elections due in 2024, the 1 February budget would effectively be her poll budget but neither fiscal resources nor the global economy is conducive for populist spending, not that her BJP likes that sort of a thing.

Inflation is not under control, one more interest rate hike is expected from the Reserve Bank of India and both Europe and the US are clawing back from double-digit inflation that kept global investors on the tenterhooks through 2022 in addition to Russia's bloody invasion of Ukraine that shot fuel prices up.

Why Capital expenditure(Capex) Is a Key Focal Point of This Budget

With a domestic demographic transition on (keep the shorthand reference of one million workers entering the workforce every month handy), India needs a higher growth path and matching jobs, and this requires a pump-up of capital expenditure with minimum stress on the budget.

This is where the Modi government has to think out of the box or, in cricketing terms, find the gap between slip and gully.

Capital expenditure which could include everything from new equipment and factories to buildings, healthcare spending and education outlays, are vital for both industrial growth and infrastructure that enables higher productivity.

Fortunately for Team India, there are some gaps and inherent strengths that might well help the government assuming there is some smart footwork. The biggest of them all is the so-called India Growth Story that remains intact, though government optimism on it often runs higher than ground realities.

With hundreds of millions of Indians stepping up aspirations and needs alike, long-term investors may be lured by incentives that need not involve actual government expenditure. From speeding up approvals to marketing roadshows, the government can hasten the process with focused campaigns.

The Mood of the Poll-Budget & Govt’s Fiscal Plans

But if the government wants to walk its own talk, it may want to consider what I would call the Nibot Tax or the opposite of a Tobin tax named after a Nobel-prize-winning economist who suggested a tax on foreign capital to curb speculative inflows. India could reverse engineer Tobin by offering tax cuts only for early bird Foreign Direct Investment (FDI) projects that go beyond the intent to actual investment. This may act as a counter-cyclical impulse to the current mood in advanced economies.

Global analysts are reconciled to the fact that an election-year budget may delay a much-anticipated fiscal consolidation, and this may be turned into an advantage. Wall Street powerhouse Goldman Sachs said last month that the Union government is likely to bring down the fiscal deficit to 5.9 % in the year to March 2024 from the estimated 6.4% in the current year with some reduction in subsidies. Fiscal consolidation would ensure macroeconomic stability, less government borrowing, and keep interest rates in check to help private investments.


However, things may be easier than anticipated. Rating agency ICRA said this month that healthy direct tax, as well as GST (Goods and Services Tax) collections, may actually lead to more-than-budgeted revenues in the current fiscal year. Combined with expenditure savings of about Rs 100,000 crore this may help the government spend a bit more.

Several analysts expect this and a higher-than-anticipated GDP growth (currently at 7 % as per advanced estimates) to help the government meet the fiscal deficit target of 6.4%. If a mild election-year fiscal pause is added in, the government may actually have some extra elbow room to spend in 2023-24 if done carefully.

One way to do that without letting the inflation genie out of the bottle would be to stagger the expenditure by first talking it up and letting private spending bite in anticipation and backload its own capital expenditure for the latter part of the fiscal year. This may help private capital expenditure gradually "crowd in" to be in harmony with public expenditure than in conflict.

Green Energy Investments To Address Climate Crisis, on the Cards

FDI remains a strong capex possibility, especially as long-term investors do not worry about short-term obstacles. An increasing emphasis on climate change management is already taking prospective investors towards green hydrogen, solar energy and other climate-friendly industries.

An estimated USD 7 billion was doled out worldwide by venture capitalists to solar energy projects alone in 2022. Indian startups and private equity-inclined green businesses may attract more equity capital without having to worry about interest rates and bank loans the way old-world smokestack industries do.

Consulting firm Ernst & Young ranks India as the seventh most attractive destination for renewable energy investments, ahead of several developed countries including Spain, Japan and Denmark.

Prime Minister Narendra Modi said earlier this month, that India said it intends to develop about 125GW of new renewable energy sources by 2030, including exports of green hydrogen. The Adani and Ambani groups are at the forefront of green hydrogen ambitions, understandably in tandem with the government. Smart negotiations with sovereign wealth funds may help India in both green business and infrastructure projects.

If large, credible Indian groups raise 'masala bonds' (rupee-denominated bonds that involve no foreign exchange risk) in international markets, it can help private capital expenditure without hurting the government budget.

Global Implications on Indian Economy

Meanwhile, Indian banks are sitting on a potential new credit cycle in which they would be keen to lend because they have just put behind the scars of the past lending cycle that resulted in a mountain of Non-Performing Assets (NPAs), often called bad loans. With a new Insolvency and Bankruptcy Code (IBC) in place and a "bad bank" to absorb NPAs, there is an increased safety net for lenders.

Last September, the Net Non-Performing Assets (NNPA) ratio of India's commercial banks as an aggregate was at a ten-year low. This means the banks have increasingly less need to set aside provisions to cushion bad loans and more resources to lend.

A lot will depend on how the finance minister juggles walk with talk and throw in incentives for an investment and borrowings regime that will boost private capital expenditure by spotting the opportunity gaps in the system.

A spoiler in all this could be a reopening of the Chinese economy after its Covid restrictions. Some analysts expect benchmark crude oil prices to hit USD 105 per barrel by the end of the year from the current USD 84.

India's exploiting Moscow's vulnerability in the Ukraine war to buy cheaper oil from Russia is a case of Smart Alec finance, but, at the end of the day, global oil prices could stoke inflation. China's reopening could mean an overall boost for the world economy, but not necessarily a good thing for India.

For Minister Nirmala Sitharaman, the window of opportunity exists but is limited in time and scope by fiscal headwinds and global constraints.

Read Part 1 here.

(The writer is a senior journalist and commentator who has worked for Reuters, Economic Times, Business Standard, and Hindustan Times. He can be reached on Twitter @madversity.

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