The global economy is now entering its fourth year with a greater risk of recession after three years of multiple, complex, and disparate challenges, including supply chain disruptions, a pandemic, war, rising protectionism, and high inflation. This has made it difficult for governments around the world to choose policies. Given this background, the Union Budget 2023–2024 is especially significant because it will be the final full budget before the 2024 general elections.
The government must strike a delicate balance between fiscal prudence and productive spending while simultaneously announcing growth-promoting measures, creating jobs, supporting troubled micro, small, and medium-sized businesses (MSMEs), providing masses with social support, focusing on green energy, and continuing the infrastructure push. Importantly, in the event of a significant global slowdown, a suitable support mechanism must be developed while fiscal challenges are managed. As a result, while the government will have many priorities in this Budget, only a few are significant enough to be mentioned.
Insist on India's independence to create more jobs: India should put a strong emphasis on creating opportunities to attract investor interest as countries diversify their supply chains. We anticipate that the government will expand the PLI programs to include new industries like aircraft, including unmanned aerial vehicles (UAVs), artificial intelligence, robotics, and automation, and electricity storage systems. In addition, the development of an organized market for traditional products and the acceleration of efforts toward the one district, one product (OPOP) scheme would support the rural economy by creating growth centers, encouraging self-reliance, and linking this to the creation of export hubs. Additionally, this would aid in job creation.
Support for troubled MSMEs—the largest source of employment—despite the fact that MSMEs have not yet recovered from the twin shocks of the Covivirus-19 pandemic and the Russia-Ukraine crisis, they have also been affected by monetary tightening. Their investment strategy and bottom line growth are both being harmed by rising interest rates and input costs. On the other hand, the crisis caused by the cost of living is still affecting consumer confidence and demand for goods and services, which is hurting their growth in the top line. In this setting, the government ought to keep supporting MSMEs.
Support under the Interest Equalization Scheme ought to be reinstated at 5% for manufacturer MSMEs and 3% for merchant exporters in light of the rapid rise in interest rates. The service industry should also be included in the program. The credit limit should be increased automatically by 25% for exporters without the need for collateral. In addition, the ceiling for the foreign currency pre-shipment credit ought to be 200 basis points higher than the London Interbank Offer Rate (LIBOR).
Import tariffs have increased for a number of product categories since 2018. The government should gradually eliminate import tariffs and include a "sunset" clause in any such protection. Domestic MSMEs' competitiveness will rise as a result. India's share of high-value-added technology-intensive exports will rise significantly as a result of the integration of industrial, foreign direct investment, and trade policies. The District Industries Centers must provide sufficient infrastructure to support the One District, One Product concept. Cross-border e-commerce should also be made easier and given the same benefits as traditional exports by the government. By 2027, it should be set a goal to have 10% of merchandise exports come from e-commerce retail.
Assistance for the masses affected by the crisis that lasted three years for households to save in order to prepare for a prolonged slowdown could be achieved by raising the Section 80C threshold or providing tax incentives for pension and insurance savings.
The world's difficulties with food and fertilizer as a result of the geopolitical crisis may have prompted the budget to place an emphasis on these two areas as well. Incentives for investing in post-harvest material handling and processing, improved organic farming practices, and adopting sustainable agricultural practices to reduce carbon emissions may be the focus areas in the agricultural sector.
Due to the skyrocketing prices of fertilizer brought on by the conflict between Russia and Ukraine, farmers suffered significant losses in 2021 and 2022. Additional reforms are required in the sector due to India's fertilizer import dependence and the massive subsidies that farmers were required to receive in 2023. The government could come up with the right incentives to use bio-fertilizers in place of conventional fertilizers, encourage practices that make fertilizer use more rational, and encourage best practices and newer technologies.
Quality of spending on infrastructure as a result of fiscal consolidation: In the midst of fiscal consolidation, the government would have to identify and justify some non-priority spending in order to commit to additional capital expenditures. We anticipate that the Centre will continue to provide states with long-term capex funds. In spite of the fact that the government offered states interest-free, Rs 1 trillion, 50-year capital loans in the most recent Union Budget, it is critical to encourage states to spend more on capital. While state reforms received 20% of the above fund, the government could also use a portion of the 2023–2024 fund to spend on green infrastructure.
Macroeconomic stability would be essential in light of the economy's current state of uncertainty and the numerous external shocks it is experiencing. It will be essential to adhere to the fiscal deficit target and remain on the glide path in order to restore macroeconomic stability and the growth rate to its pre-pandemic growth path. However, given that global risks persist, it would be essential to maintain fiscal prudence without limiting growth. As a result, we anticipate that the government will outline not only the framework for its growth strategy for this decade but also some concrete measures to prepare the economy for the impending global slowdown. At this point, the economy could reach a turning point with the right policy decisions.
Dr. Arun Singh is Dun & Bradstreet India's Global Chief Economist.