It proposes ₹10 lakh crore capital expenditure and an increased personal income tax rebate till Rs 7 lakh. Experts as well as industry leaders see these numbers total to a big boost just when it’s needed — consumers aren’t buying enough goods and companies are shying away from investment.
These numbers may not constitute or have come packaged as a fiscal stimulus (rather the government is averse to a debt-funded spending spree and hopes, as the Economic Survey said, that fiscal discipline would itself produce ultimately a fiscal stimulus). If not a stimulus, they sure make for a big push.
Consider the capex first, the big number 10.
The budget has raised capital spending for the next financial year to ₹10 lakh crore, which is a 33% raise on the previous year and as big as 3.3% of the GDP. Effective capex, which includes grants to states, will jack up the number to ₹13.7 lakh crore, which amounts to a hefty 4.5% of the GDP — you can’t fault the finance minister for not trying.
The onus for economic growth has solely been on the government for quite some time. Despite its persistent efforts, private companies are not willing to raise capital spending, jobs remain a problem and consumer demand stays limp.
Rs 10 lakh crore will pour into roads, railways, ports and other large development projects, and is then expected to create more jobs, giving people more money to spend and ‘crowding in’ the private investment. That’s what they call a multiplier effect. A big stone thrown in a pool will create big ripples.The infrastructure to be funded includes 100 critical transport projects for the last- and first-mile connectivity.
These projects are part of the PM Gati Shakti – National Master Plan, which integrates transport infrastructure to cut logistics costs. You can call it the project that builds the lifelines of the economy. In the budget, the transport sector remains the largest item for expenditure with an allocation of Rs 5.17 lakh crore against Rs 3.90 lakh crore in the current one. Infrastructure assets built for the long term also yield economic growth dividend for a long time to come.
“In the backdrop of an anticipated slowdown in global growth, reliance on public capex as a countercyclical policy will help in supporting overall growth,” Vivek Kumar, an economist at QuantEco Research in Mumbai, has told ET.
Now consider the other big number, 7.
The budget raises the threshold for income tax rebate to Rs. 7 lakh from Rs. 5 lakh, which means a person earning below that amount will pay no tax. This number may smell like a pre-election sop but with election still quite far off, it’s more likely the government is just trying to wean taxpayers away from the old tax regime to the new one which rids the personal taxation of several exemptions and makes it transparent, of course, by offering lower tax rates.
Whatever the intentions of the government, what this tax rebate actually does is put more money in the hands of people, the people who are not spending as much as the businesses want and the economy needs. The rebate will boost the purchasing power of the middle class in small towns, where a number of companies are looking for new markets away from saturated metros, and also in rural areas where sale of two-wheelers has gone down even when the overall auto sector has done well, an indicator of depressed consumer demand at the lower end.
The budget is giving these people more money to spend. An ET story says demand from the rural market – which contributes more than 35% to annual FMCG sales – has slowed down significantly over the last five to six quarters, mainly due to steep inflation. The extent of de-growth in the hinterlands, however, has reduced from double-digits in early 2022 to 6% slump in December. These measures in the budget are expected to speed up this recovery process. By giving them extra cash, the government hopes people will be spending it on buying consumer goods such as potato chips, shampoos, refrigerators, washings machines and two-wheelers. That would mean more money for the companies which will then be less shy of investing in new projects. And all that will boost economic growth.
“While tax rationalisation will increase the disposable income only marginally, it would boost sentiments, which, in turn, will lead to demand revival to some extent,” Nikunj Sanghi, managing director of JS Fourwheels, largest dealer of two-wheeler market leader Hero MotoCorp in North India, told ET.
Both the ‘lucky numbers’ of the budget come when government spending is required to spur demand and make industry invest in new projects and hire more people.
Several experts and industry leaders agree the two numbers give the economy what it just needs — a tight demand-side whack.