Expectations From Union Budget 2023: The Great Leap Forward

As an annual accounting exercise for the nation, the Union Budget has been a fairly prosaic thing with incremental steps, underlined, almost always, by a constraint from the resources available. Even then, it is not as if, the occasional budget such as P Chidambaram’s ‘Dream Budget’ of 1997, with its emphasis on lower taxes and the Laffer Curve that expected lower taxes to furnish bigger yields, did not happen.

After 1991, and the era of liberalisation, the breaking away from the Licence-Permit Raj, it was in a way expected.

The last year’s budget for FY23 speeded things up considerably, when capital expenditure for infrastructure development was enhanced 24% to Rs. 7.5 trillion, more than double what it was in FY20. It will no doubt be enhanced to at least Rs. 10 trillion for FY24, which represents about 3% of GDP. This more so because this budget has been spent at a rate 63% greater in the first eight months of this fiscal up to November 2022, at Rs. 4.47 trillion. Infrastructure development is something of a hallmark of the BJP/NDA government.

 But now, as the nation reaches out to Amritkaal over the next 25 years, bolder steps and an even quicker pace are called for.

The nation must lay the groundwork for huge resource mobilisation, not just via sovereign borrowing, but massive private sector investment from home and abroad. This means the India story, with its huge domestic market and large work-force, must turn even more attractive. The paradigm shift called for is for this Amritkaal vision to drive the Union Budget, rather than a constant worry about deficits going out of control.

We may not meet the fiscal deficit target of 5-4.5% of GDP for a couple of years more, but if the extra money is spent in a worthwhile manner, this will not matter. Particularly since most development commitments are paid out in tranches over several years.

This could be the last full union budget to be presented by the incumbent Modi government. Next year, 2024, it is likely to be a vote-on-account to service the government’s liabilities, till a new government is sworn in. But, like 2019, the Modi government, in its confidence, may choose to submit a full budget in 2024 as well, with the proviso that large portions of it must be voted into effect after the new government takes charge.

As before in 2019, the new government too is likely to be a BJP/NDA government once more, giving them a consecutive three terms. The Opposition at present, disunited, disparate, under-funded, at loggerheads with the electorate, does not seem capable of mounting a serious challenge. This state of affairs must be calculated into budget 2023 and 2024.

For 2023 what should we expect? There may be some easing of direct taxation norms to please the salary earning middle class as the nation goes into 9 assembly elections before the general election in 2024. Likewise enhancements in rural spending to revive demand, and a slew of populist welfare measures to blunt the opposition tendency to offer freebies.

GST collections have been growing, and is expected to top Rs. 273 trillion in this fiscal against an earlier estimate of some Rs. 237 trillion. GDP too is growing at about 7% year-on-year and is expected to do so for a decade to come.

Any election year duo of budgets for 2023 and 2024, must work in the prospect of higher revenue collections and growth in GDP to deliver both immediate and longer-term benefits.

There may be some incentivisation of existing business and industry by way of tax reliefs, with a much greater incentive for expansion into new areas and greenfield joint ventures with foreign entities. This might be incremental and not really the bold moves called for.

With the government’s massive spending plans on infrastructure, defence, civic services, healthcare, education, and welfare, many are expecting the current account deficit to be let slip by 0.5%. Based on projected revenue and GDP growth, India can certainly afford it.

 Where should India enhance its budgets- certainly in defence manufacturing and procurement with an effort at keeping the money in country as much as possible. Accordingly, the amount set aside for domestic defence procurement in 2022 is 68% of the defence services capital acquisition budget of Rs. 1.24 lakh crore. To encourage private sector participation from the likes of L&T, Mahindra and Tata, certain dockyards and so forth, some 25% of the domestic procurement budget, or Rs. 21, 149 crore, has been earmarked for them.  Policy wise, these are good steps, but the sums involved are much too modest.

This defence acquisition budget of 1.24 lakh crores is itself all too paltry for our needs, both in terms of domestic capacity enhancement, and export ambitions. 68% may sound impressive as a domestic manufacture figure, but the pie is much too small, and then there is just a small amount going to the private sector. It is not incentive enough for domestic armaments manufacture to take off substantially as required. That is why it takes us so long to manufacture a single Tejas jet at HAL for example. It has near cottage industry capacity.

We have long been first or second in defence purchases in the world, fattening the purse of the Russians, French and Americans while being hamstrung for spare parts and ammunition. And indeed hard pressed to get them to stick to agreed prices, purchase, and post-purchase commitments.

Relatively, things have improved dramatically compared to a near non-acquisition for some quarter of a century, citing paucity of funds. This deeply compromised our national security and emboldened our enemies.

Today we have revamped ammunition production domestically and emergency purchased armaments to plug a lot of yawning gaps, but we still have a long way to go to develop a proper deterrent capacity.   

The fact that in the Republic Day parade 2023 the government chose to only display Made in India weaponry emphasised the change in our strategic thinking.

But the defence procurement budget should be more like Rs. 5 trillion with a 10% increase year-on-year. The percentages of domestic and foreign procurement may well be narrowed further as a consequence. Our latest commissioned submarine has a lot of India made parts. So does our aircraft carrier.

This is the only way we can create a formidable deterrent, and grow an export market in weapons to rival the vastly more expensive and sometimes not as innovative offers from the West and Russia. Our indigenous light combat helicopter and the recently commissioned Prachanda helicopters can operate with full weapon loads at 18,000 feet, unlike any of the imported helicopters even from the US.

Israel is a very useful joint venture partner and a fund of information on how to get the domestic armaments industry going as well. The 30 centres of excellence in various states that India has developed with Israel in the development of crops for semi-arid regions and advanced agricultural techniques, is a step already in the works.

No country that will be No.3 economically by 2028 can afford to be begging the big Western manufacturers for high technology weapons.

Next, we need a brand new, state-of-the-art and well-funded department of Research & Development, for defence- with much bigger budgets for DRDO, industry, manufacturing, construction, pharmaceuticals, agriculture, perhaps even a fresh ministry to look after it. DRDO now boldly says it can develop all sorts of engines for aircraft and ships. It has just supplied the propulsion system for the new Kalavari class submarine. A few years ago it was thought to be incapable. What is its future with political encouragement and lavish budgets?

This emphasis on R&D is essential as India aspires to become the new manufacturing hub of the world, as well as develop its own technology breakthroughs via its heavy industry, electronics, software and the world’s largest number of Unicorns and Start-ups. Artificial Intelligence, fighter, payload carrier and passenger drones, breakthroughs in alternative energy deployment, could all result in short order.

The pharmaceutical industry, expected to grow to $ 130 billion by 2030, particularly in generics, needs a major injection of funds and incentives to truly emerge as an unchallenged pharmacy to the world. This, with a wide range of life savings, drugs, medicines and vaccines. Our internal checks and balances and quality standard maintaining procedures must be made fool -proof if we are going to take on the global pharma industry- and avoid black marks such as the recent cough mixture controversies.

What is already being done to modernise and develop infrastructure, roads, ports, tunnels, dams must continue at a fast pace. The Indian Railways is being made financially viable and changed beyond recognition from its 19^th and 20^th century versions. The multiplying city Metro systems are renewing travel in logjammed cities. The long sea bridges, near sea coast transport including RO-RO ships, riverine transport at a fraction of the cost, all this must continue surging ahead, and not suffer any paucity of funds. This is the big push to reduce logistic costs from a high of 14% to less than 9%. It sets up a virtuous cycle for industry and attracts more and more foreign investment. The government seems well seized of this.

The commendable launch of an indigenous 5G system and burgeoning digitisation must continue apace. This is conjunct on India’s space programme because it will be satellites that will now connect the remotest parts of the country rather than terrestrial towers alone. The Spacex satellite system that has provided Ukraine its communications during this war are a great illustrator of what is possible. Of course, with India’s sheer numbers, unit costs soon become manageable and commercially viable.

 The new Indian operating system to rival Android and the IOS platforms is an exciting development and must be backed with sufficient funds. It is said to be superior to IOS and Android but that needs to be proved on the ground as soon as possible.

The various PLI schemes expected to attract investment of Rs. 4 lakh crores must be vastly enhanced. Since its introduction in 2020 it has done much to galvanise 14 sectors of industry it applies to. India put out Rs. 2.5 trillion, which, in turn, is expected to add almost one percentage point to GDP per annum, and create 4 million plus new jobs. But the window of opportunity will not stay open for long. China is weak now. We should increase the PLI scheme to Rs. 5 trillion as well. It could attract as much as Rs. 10 lakh crores in investment at this time. We would be flattening the uneven field to compete with rivals trying to attract the China manufacturing ‘refugees’ at this time.

India will want to encourage more and more foreign entities to set up manufacturing here, not only for the exciting semi-conductor industry, but for every other company in any field that wants to relocate from China or elsewhere. This surge of manufacturing activity will grow our export markets exponentially, strengthen our currency to a desirable stability, and provide millions of new jobs backed by a much improved logistics infrastructure.

Budget 2023 must lay strong foundations and glide paths for Amritkaal even as it looks and feels like an election year budget.

(1876 words)

January 26^th, 2023

For: Firstpost/News18.com

Gautam Mukherjee