‘Budget’s tax, capex focus can boost real GDP growth to 7%’

“Taking the Economic Survey’s growth projection of 6.5 per cent as the base, the Union Budget’s tax, capex and fiscal consolidation proposals can take India’s real GDP growth close to 7 per cent in 2023-24 if they are effectively implemented,” the RBI said in the State of Economy report.

The report, published in the RBI’s February bulletin, has been authored by Deputy Governor Michael Patra and 32 other officials. The views are of the authors and not of the RBI, the report said.

The tax changes proposed in the Budget will put at least Rs 35,000 crore in the hands of households, it said.

The report said that the saving on taxes will boost consumption spending. With India’s marginal propensity to consume (MPC) estimated at 0.54, the tax multiplier works out to be 1.16.

“Hence, India’s real GDP growth would get a boost of 15 basis points in 2023-24 from tax reductions alone,” it said.

The effective capital expenditure of the Union government is budgeted to increase to Rs 13.7 lakh crore in 2023-24 (budget estimate) from Rs 10.5 lakh crore in 2022-23 (revised estimate).

According to the report, the increase in the allocation for capital expenditure works out to Rs 3.2 lakh crore in 2023-24, which will generate additional output of Rs 10.3 lakh crore during 2023-27.

Continuing the path of fiscal consolidation, the Budget announced the FY2023-24 fiscal deficit to be at 5.9 per cent of GDP. The report said fiscal consolidation can free up productive resources for the private sector and also contribute to lowering the cost of capital. In the Union Budget, total expenditure is budgeted to decline by 0.41 per cent of GDP, which will free up resources for private investment.

“In conjunction with the expenditure multiplier, this can raise the growth rate of the economy in 2023-24 by 10 basis points,” it said.

The RBI report said the environment of macroeconomic stability engendered by fiscal consolidation and hence reduction of debt is expected to bring down inflation in the medium run, with a consequent reduction in macroeconomic volatility and country risk premium, ushering in a virtuous cycle.

It said the estimates suggest that on a standalone basis, this could lead to a reduction in inflation by an average of 26 basis points per annum over the next five years which, in turn, would push up potential growth by another 10 basis points.