Milton Friedman famously said that “Inflation is taxation without legislation.” While this is true from the taxpayer’s perspective, inflation can be a real boon for the finance minister. Advance estimates by NSO project India’s nominal GDP growth for FY23 at 15.4 percent against the Budget estimate of 11.1 percent, thanks to the high inflation of FY23. The estimated nominal GDP of Rs 273 lakh crores against the budget estimate of Rs 254 lakh crores is the bounty bestowed on the finance minister by the unusually high GDP deflator (a mix of CPI and WPI inflation) of around 8.5 percent. Since the crucial fiscal deficit is expressed as a percentage of nominal GDP, the higher denominator has given the FM a rare opportunity to spend Rs 82000 crores more than budgeted and yet contain the fiscal deficit at the budgeted target of 6.4 percent of the GDP. However, the FM must be cautious because this favorable scenario will not repeat in FY24 since growth is slowing and inflation is declining.
Stick to the fiscal consolidation path
Financial stability is an essential requirement to sustain a decent growth rate. India’s fiscal deficit and current account deficit are high, though not alarming. It is hugely important for India to sustain the GDP growth rate at a high level to contain these deficits. FY24 will be a challenging year since global growth is slowing down sharply. All the three engines of global growth – the US, the Euro Zone, and China – are slowing down and, therefore, global growth is expected to slow down to 2.1 percent in 2023 (IMF). This will adversely impact global trade, too. Since India’s trade to GDP is around 45 percent now, global slowdown is sure to impact India’s growth, too. Therefore, a realistic expectation would be a growth rate of 6 percent in FY24. Since inflation is expected to decline in FY24, the nominal GDP growth also will be lower. Also, it would be unrealistic to expect tax buoyancy in
FY24 to continue at the same rate as in FY23. Therefore, the FM must exercise caution with realistic nominal GDP growth and tax buoyancy in FY24 while targeting a fiscal deficit target of 6 percent in FY24.
Simplify the Capital Gains Tax
Since GST reforms happen under GST Council and we have a stable direct tax regime it would be unrealistic to expect major announcements on taxation other than benefits like raising the IT exemption limit for taxpayers. However, there is room for reform of the complex capital gains tax regime plagued by multiple tax rates and holding periods for different asset classes like equity, debt, and immovable property.
The political angle
Budget 2024 is politically significant as the last full Budget before the General Elections of 2024. Since politics is the ‘art of the possible’, the ruling party can be expected to use the Budget for some political mileage. This may come in the form of income tax relief to the middle class. Since the new tax regime without exemptions is yet to take-off, the FM is likely to offer more incentives in this regime by raising the IT exemption limit to, say, Rs 5 lakh.
Budget 2024 is also important from another angle. This would be the first Budget after India assumed the presidency of G20. G20 strives for stable economic growth and global prosperity. Therefore, the FM can be expected to deliver a message of sound economics shunning negative populism.
First published in The Economic Times
