The new NDA government’s budget is likely to bake in higher-than-expected growth in the previous year and an unexpected bounty in central bank profits to aim for speedier fiscal correction. This course would support growth by lowering interest rates. If the budget sticks to the medium-term budgetary roadmap, it would be on account of pushing ahead with capex, which is serving as a ballast to slow consumption growth. The desired crowding-in of private investment is in evidence, although widespread capacity expansion is held back by rural consumption. A middle path – and the most probable scenario – would be a somewhat quicker fiscal consolidation in the budget alongside a delayed tapering of capex.
Revenue mobilisation, on its part, is also being propped up by higher growth. In keeping with recent experience, the budget can be conservative with revenue projects as administrative improvements raise the buoyancy of direct and indirect taxes. Scope for tax rate adjustments is limited in direct taxes, although GST offers much more leeway. Asset sales are unlikely to be high up on the budget agenda if the public sector turns in higher dividends because of higher government capex. Telecom spectrum sales should add comfort to the revenue side. The budget should aim for greater control over revenue expenditure by plugging leaks in welfare delivery, which can translate to improved social security coverage.The budget, as a significant policy instrument, could signal GoI’s social security agenda over the medium term. This will affect the economic momentum. PLIs for manufacturing exports are delivering results in select sectors, and the budget would be a good occasion to review import duty structures to make an even larger impact. The budget, scheduled to be announced next month, will be the government’s most elaborate signal for policy continuity, and structural changes to the economy can be expected through reforms in the works.
