Budget 2023-24: Fiscally conservative but lacking economic strategy

  • Blog Post Date 27 February, 2023
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Rajeswari Sengupta

Indira Gandhi Institute of Development Research

The Indian economy’s recovery from the Covid-19 pandemic has not been all good news: employment creation has stagnated, and government capex allocation has not been successful in generating private sector investment. Against this backdrop, Rajeswari Sengupta discusses two missed opportunities for the Union Budget – announcing strong growth-oriented policies, which could help meet the medium-term fiscal deficit target to increase macroeconomic stability; and boosting India's trade competitiveness by reducing import tariffs and focussing on exports. 

The Union Budget for FY2023-24, presented by the Finance Minister on 1 February, has been lauded by various stakeholders for showcasing fiscal prudence. At a time when the consolidated fiscal deficit of the central and state governments has been above 10% for three consecutive years, the fiscally conservative stance adopted in the budget was a welcome change. 

Having said that, did the budget reflect missed opportunities? In this context the economic background against which the budget was presented assumes great significance. 

State of the economy

The last year has been characterised by unprecedented uncertainty, even as India and other countries around the world started coming out of the Covid-19 pandemic. The land war in Europe and associated sanctions on Russia imposed by the western countries, China’s zero-Covid restrictions amidst a resurgence of Covid cases, developed countries such as the US, UK and EU nations experiencing the worst streak of inflation in four decades, forcing their respective central banks to aggressively raise interest rates – these simultaneous global shocks created widespread risk aversion, and imposed a drag on global economic growth. The IMF projects that global growth will fall from 3.4% in 2022 to 2.9% in 2023, much lower than the historical average of 3.8%. 

Even though, by some measures, the Indian economy has recovered from the pandemic, there is evidence that the recovery has been uneven and feeble, with the formal sector faring much better than the vast informal sector that employs more than 90% of country’s workforce (Dev and Sengupta 2022). A fragmented geopolitical landscape, and persistent global macroeconomic uncertainty also act as potential headwinds for the economy’s future growth trajectory. There are other concerns too for medium- to long-term growth. 

The two main drivers of growth for an economy are investment and exports. In India, private sector investment continues to be sluggish. One indicator of investment demand is the projects under implementation in the private sector. Data from the CMIE’s Capex database shows that, adjusted for inflation, the value of private investment under implementation had been declining in the post-demonetisation, pre-pandemic period. It underwent a brief revival in 2021-22, before declining again from June 2022 onwards. Despite corporate balance sheets being healthier than in the pre-pandemic period, there are no signs of a major uptick in investment. 

The economic recovery that was underway in 2021-22 was largely driven by an unexpected surge in exports, triggered in turn by developed economies recovering from the pandemic. During the period from March 2021 to June 2022, non-oil exports grew at an average rate of 40%. Since then, however, exports have been declining at an average rate of 5%. While service sector exports have been faring very well, merchandise exports have been consistently falling. 

Official GDP data in India is fraught with measurement issues (Nagaraj et al. 2020). In the absence of reliable GDP data, the aggregate state of the economy is best understood using one metric: the total number of people employed. According to data from the CMIE’s Consumer Pyramids Households Survey, this number has been stagnant at around 400 million since 2015. The total number employed in both formal and informal sectors stood at 410.5 million in January 2020. In January 2023, it was 409.3 million. This shows that employment creation has been stagnant for years, which is deeply problematic for a country that boasts a demographic dividend and aspires to achieve developed country status. 

The biggest challenge facing the Indian economy at the current juncture, therefore, is achieving a high, sustainable growth rate, and creating a sufficient number of jobs to absorb the millions of unemployed, amidst a highly volatile and uncertain global economic environment that is dealing with the repercussions of multiple adverse shocks. 

Against this background, what could the budget have done better, given that it is not only a statement of income and expenditure of the government but also an important document wherein the government can lay out its economic vision and strategy for the future? 

Missed opportunity: Growth strategy

One of the main highlights of the budget was a steep increase in capital expenditure (capex), by almost 33% compared to the amount budgeted for 2022-23, to a record high of Rs. 10 trillion. This shows that the government is pursuing a growth strategy that is based on the expectation that government investment will ‘crowd-in’ private sector investment. In other words, they expect that government investment in roads, railways, defence etc. will generate demand in other related sectors, which in turn will incentivise the private sector to start investing. 

However, the effectiveness of this strategy remains questionable. The government has been increasing its capex spending for three consecutive years, and between financial years 2021-22 and 2023-24, capex allocation has increased by close to 70%. However, the growth in private sector investment continues to be weak. Clearly the expected ‘crowding-in’ is not taking place. This is perhaps because private investment is held back by other factors such as policy uncertainty, lacklustre demand, and uncertainty about the macroeconomic outlook. The increased expenditure by the government is putting pressure on the fiscal deficit, raising the debt level, and increasing the government’s interest payment obligations. More than 40% of the revenue earned by the government is being used to make interest payments. 

What the budget could have instead done was focus on the other engine of growth– exports. For India, exports have always remained an unexploited area of economic dynamism, compared to many of its Asian peers. 

India now faces an excellent opportunity to achieve high growth through a boost in exports. This is because a large number of foreign multinational companies (MNCs) are increasingly looking to de-risk away from China, owing to the nation’s imposition of Covid-related lockdowns and resultant supply chain disruptions, as well as rising production costs and other geopolitical tensions. Several of India’s Asian peers (notably Vietnam) have already benefitted from this ‘China+n’ policy followed by MNCs. India needs to embrace this opportunity as well, and establish a conducive, liberal trade regime, thereby signalling to the world that it is open for business. 

Quite conversely, in recent times, India seems to have taken a turn towards protectionism. For example, the average most favoured nation applied tariff on non-agricultural imports has gone up from 10% in 2015 to 15% in 2021. This is much higher than the tariffs in India’s East Asian competitors, and hence impacts India’s prospects of becoming an attractive destination for the MNCs. In today’s world of global value chains, no MNC would relocate to India unless they are able to import goods from their suppliers located all over the world. 

The budget could have reversed this inward orientation by announcing wide ranging reductions in import tariffs to boost India’s competitiveness and to facilitate participation in global value chains, and pitching India as an attractive destination for investment and production. Given India’s minuscule share in global merchandise exports (only 1.6%), even if global growth slows down, India could still benefit enormously if it adopted a broad-based export-oriented policy framework. 

Moreover, one of the important pre-conditions for sustained growth is macroeconomic stability. High levels of fiscal deficit and debt are inimical to stability and hence growth. It seems that the budget also missed an opportunity in this regard. 

Missed opportunity: Fiscal consolidation path

For several years the government has been struggling to spend within its means. In the pre-pandemic financial year of 2019-20, the fiscal deficit of the central government alone was more than 4.5% of GDP, much higher than the 3% medium-term target set by the Fiscal Responsibility and Budget Management (FRBM) Act. 

During the pandemic period, the deficit shot up, first to 9.2% of GDP in 2020-21, and then to 6.9% in 2021-22. The consolidated central and state government deficits were as high as 13.3% and 9.6% of GDP in 2020-21 and 2021-22 respectively. As a result of persistently high deficits, the total central and state government debt amounted to 84% of GDP in 2022-23: an uncomfortably high level compared to an average of 74% in the period from 2010-11 to 2019-20. High levels of government deficit and debt are bound to raise concerns about macroeconomic stability – all eyes were on the budget this year to understand what the fiscal consolidation path would look like going forward. 

The budget partially delivered on this account. It adhered to the fiscal deficit target of 6.4% for 2022-23, and projected a fiscal deficit of 5.9% for 2023-24. What it lacked however was a clear and well-defined medium-term fiscal consolidation strategy. 

The Finance Minister announced that the fiscal deficit of the central government would be brought down to less than 4.5% by 2025-26 (which itself is on the higher side, given the FRBM target of 3%). This requires a sharp deficit reduction by at least 2% in the next three years, a seemingly impossible task unless any or all of the following conditions hold: 

i) The government increases taxes

ii) The government winds down welfare programmes and cuts subsidies

iii) The economy grows rapidly 

We can rule out the possibility of raising taxes at a time when the economy is slowing down. 

As regards schemes and subsidies, the budget estimates only a 1.2% increase in revenue expenditure for 2023-24, making it the lowest growth in revenue expenditure in nearly four decades. The outlay on subsidies is already budgeted to decline by close to 30%, making it doubtful that there would be much room left to further cut subsidies. For example, the government has replaced the free-food scheme (PMGKAY) that was implemented during Covid with distribution of free food grains through the Public Distribution System (PDS). In the past, there was always the possibility that the government could reduce the budget deficit by raising the prices at which food grains were distributed through the PDS, but now that grains have been provided for free, it will be difficult to start charging households again. 

Similarly, the budget has reduced the allocation for the flagship NREGA programme by nearly 33%. Given the lacklustre employment creation, the demand for NREGA is likely to continue to be high, thereby forcing the government to increase allocation for this programme in subsequent years. In other words, the second option also does not seem feasible. 

This brings us to the final possibility – strong economic growth which would raise nominal GDP, reduce the fiscal deficit ratio, and yet provide the government with enough resources to fund welfare programmes. 

But as discussed in the previous section, the budget did not contain growth-oriented policy announcements. In other words, the medium-term fiscal consolidation strategy remains unclear, which is detrimental for macroeconomic stability and growth. The fact that the budget did not contain any well-defined strategies for generating rapid growth either might in turn make it difficult to achieve fiscal consolidation. 


The Union Budget for FY2023-24 was a conservative budget in some sense, but it did not throw light on how the government plans to reduce the fiscal deficit from 6.4% in 2022-23 to the targetted level of less than 4.5% in 2025-26. It was important for the government to delineate such a plan, as that creates macroeconomic stability, establishes the credibility of the government, and most importantly, gives confidence to the private sector. 

One crucial way of reducing fiscal deficit is through high and rapid growth. Even in this regard, the budget fell short. While the government continued its emphasis on capex spending, it is increasingly becoming clear that government investment is not enough to spur private sector investment. What the budget could have done instead was to reverse the inward orientation of the Indian economy, and announce policy actions to encourage exports. It is worth noting that no major country in the world has managed to sustain rapid economic growth without a strong performance in exports. By not focusing on this crucial engine of growth, the budget missed a golden opportunity. 

The absence of a coherent medium-term growth strategy, especially at a time when the Indian economy is expected to slow down, is deeply worrisome given that this was the last full budget before the national elections. 

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