Union Budget 2023: Tax cuts, factory incentives: What to watch for in India Budget

Budget 2023: FM may tweak income-tax slabs to provide relief to middle class and increase spend on the poor through rural jobs, while ramping up financial incentives for local manufacturing.

The Union Budget on February 1 will test the government’s resolve to stay fiscally prudent as expectations of lower taxes, wider social security net and further boost to production gather steam before national elections.

Finance Minister Nirmala Sitharaman may tweak income-tax slabs to provide relief to the nation’s vast middle class and increase spend on the poor through programs such as rural jobs, while ramping up financial incentives for local manufacturing, according to economists and reports in local media.

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Social welfare programs would get “appropriate” allocation as “the gap between have and have nots has widened,” said India Ratings & Research Pvt. economist Devendra Kumar Pant. Inflation has eroded spending power and relief in tax “can provide the much-needed thrust to the consumption demand.”

Prime Minister Narendra Modi’s final full-year spending plan before 2024 polls comes amid rising interest rates and slowing global growth, which could make him desist from outright populism. Economists in a Bloomberg survey see fiscal deficit narrowing to 5.9% of gross domestic product, from 6.4% this year, needing another year of record borrowing.

While markets will be closely watching for the budget speech at 11 a.m. local time to see what Asia’s third-biggest economy has in store for investors, US short seller Hindenburg’s scathing report on billionaire Gautam Adani’s conglomerate has also put spotlight on the country, and the issue may reverberate in the budget session of parliament.

Here are some of the measures to look out for in the budget:

Tax Tweaks
Sitharaman’s recent comments on knowing the “pressures of the middle class” have added to speculation she would put some money in the pockets of taxpayers. But there are no free lunches. “Any tinkering with rates at the lower income brackets will be compensated by increasing the cess/surcharge for the upper income brackets,” Yes Bank economists led by Indranil Pan said, projecting a 15% rise in tax receipts next year.

She may also raise import duties on items such as private jets, helicopters, high-end electronic items and jewelery to encourage domestic manufacturing, according to The Economic Times.

Social Sector

India’s jobless rate jumped to a 16-month high of 8.3% last month, underscoring the challenge to create jobs for the world’s biggest population. DBS Group economist Radhika Rao sees the spend on rural job guarantee topping this year’s allocation of 730 billion rupees ($9 billion), with crop insurance, rural road infrastructure and low-cost housing also getting attention.

India’s world-beating growth masks rising inequality with 21 wealthiest billionaires possessing more wealth than 700 million Indians, according to Oxfam India. The budget may widen the ambit of small savings plans for the elderly and the girl child, said Soumya Kanti Ghosh, an economist with State Bank of India.

With India positioning itself as an alternative to China in the global supply chain, manufacturers willing to set up factories in the country expect more financial benefits from the government. The budget may see production-linked incentives getting extended to sectors such as shipping containers and toys, according to a news report.

Strategies can be finetuned to provide a push to manufacturing activities and employment generation through deepening and widening of output-linked benefits, Yes Bank analysts said.

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