The 2023 Union Budget will be influenced by a number of issues, including the unstable global economy, rising inflation, declining private consumption, and slower GDP growth. The general elections, which will be the last complete budget of the administration before the Lok Sabha election in 2024, are the one element that supersedes all of the aforementioned factors. Thus, it is clear that there are some high expectations this time around. Despite the government’s temptation to announce a budget that boosts populism, its main priority will be on balancing the ACT.
WHAT TO EXPECT FROM THE PRE-ELECTION BUDGET OF THE GOVERNMENT?
One of the announcements might concern an effort to promote local manufacturing. Following a global economic recession, India’s atma nirbhar, or self-reliance, would be put to the test. In this situation, the government will be eager to increase local manufacturing to meet home demand, cut imports, and draw in foreign capital. The PLI plan’s scope, which presently covers 14 industries, might also be expanded to other areas with strong employment potential. However, a bigger allocation to the PLI scheme seems to be the natural choice given rumors that the entire budget outlay for the scheme will increase by 20 to 30%.
Another possibility is increased spending on welfare and rural areas. If figures from the previous pre-election budget are any indication, increased expenditure on welfare and rural economic development programmes may be in the works. Prior to the general elections in 2024, more money could be spent on rural and social programmes, according to a new analysis.
The government’s blueprint for the upcoming fiscal year may place a major emphasis on improving infrastructure, which was a focus of the previous budget because it fosters economic growth and job possibilities. To address the growth challenges in FY24, the government might not hold back from providing a greater allocation this year. According to experts, the budget’s main emphasis will be on generating jobs and investment-driven growth; consequently, measures to encourage infrastructure growth may be one of the budget’s highlights before attention shifts to a greener economy.
The country is still committed to achieving net zero emissions by 2027, so the government may not hesitate to announce new programmes and incentives to promote renewable energy resources. Climate change is becoming a pressing issue around the world, so the government may not hesitate to push forward with promoting sustainable, rich energy resources.
INCOME TAX RELIEF
While the government lacks the fiscal space to announce major tax reforms, it could provide some incremental benefits to the aam aadmi and prevent a sharp decline in consumption by raising deductions under common sections of the income tax act, such as section 80C and ATD applicable under the old income tax regime and revamping tax slabs and lowering tax rates under the optional income tax regime.
BOND MARKET
Fiscal deficit and Borrowing Outlook
The bond markets will be looking for clear direction on the borrowing plan and the fiscal deficit. The total amount borrowed by the government in FY21 and FY22 was Rs 12 trillion. The overall borrowings rose to Rs. 14.31 trillion in FY23, nevertheless. You may remember that the high increase in borrowings on the day of the Union Budget in 2022 put pressure on the bond markets. Additionally, the total borrowing goal for FY24 is anticipated to be close to Rs 16 trillion. However, it is anticipated that the budget deficit will be lower, at 5.8% to 6.0% of GDP.
Sovereign Green bonds and Debt funds
On the subject of green bonds, the Budget 2023–24 is anticipated to take a more aggressive stance. The budget offering special incentives to investors for sovereign green bonds can be a huge move for debt and fixed income markets. Budget 2023-24 is likely to do a lot to ensure that mutual funds play a much bigger role in the bond markets. Debt fund involvement in the bond markets can be increased and more flows into debt funds can be encouraged by a more sensible tax policy with regard to debt mutual funds. Lower expenditure and a decrease of inflation are results of the global economy slowing down. This may be an opportune moment to consider medium- to long-term bonds. Bonds offer a fixed income and can be a relatively stable addition to a portfolio. When inflation is lower, there tends to be a greater potential for bonds to deliver attractive yields, allowing investors to benefit from both consistent interest income and favorable market conditions.
Inclusion of Indian bonds in global indices
In the previous budget, it was intended to present a persuasive case for the inclusion of Indian government bonds in the widely used benchmarks JP Morgan Bond Index and the Bloomberg Bond Index. However, the decision was delayed because the government did not provide the necessary tax advantages that the worldwide funds had required. With the participation of international bond funds, the inclusion on the bond index will not only increase flows but also deepen and expand the Indian bond markets. Participation in the bond indices would result in an additional $30 billion flowing into Indian government debt. This is nearly 50% of aggregate debt flows of in the last 5 years, so for the bond markets this is a quantum leap. The government must provide these international investors with instructions on the subject of tax advantages on bonds.
Sovereign Bonds
Plans to raise $10 billion through offshore sovereign bonds (government debt denominated in a foreign currency) were included in the Union Budget 2019 but were abandoned under pressure from macroeconomic worries brought on by the pandemic. In the past, the government has been too cautious when it comes to sovereign debt; it’s time for this budget to stop being so cautious. The Indian government must stop being hesitant about its agenda for issuing sovereign bonds. India does have the freedom to go all out and aggressively raise money through sovereign bonds because its foreign exchange reserves are above $560 billion.
Inflation
Since the majority of monetary levers for adjusting inflation have been used up, using fiscal levers will be a major problem for the government. The rate outlook and the need to promote growth at any costs will be the main influences on bond market mood. How the budget depicts inflation for the upcoming year will have a big impact. The quantity of government borrowings and the prospect for inflation versus growth are typically two elements that bond markets use as budget indications. Rate increases of 2.25% were consistently implemented in 2022, which slightly slowed inflation.
Summary
Instability in the world economy, rising inflation, falling private spending, and slower GDP growth will have an impact on the 2023 Union Budget. More funds could be allocated to rural and social programmes before the general elections in 2024. The creation of jobs and growth that is driven by investment will be the budget’s key focal points. The fiscal deficit and borrowing plan will be topics that the bond markets want to be clearly outlined. In FY21 and FY22, the government borrowed a total of Rs 12 trillion.
Mutual funds are projected to play a substantially larger role in the bond markets as a result of the budget for 2023–24. India failed to make a compelling argument in its previous budget for the inclusion of Indian government bonds in widely recognised benchmarks. Index of JP and Bloomberg Bond Index. Participation in the bond indices would increase the amount of money going into Indian government debt by $30 billion. Regarding tax benefits on bonds, the government must issue guidelines.
