Middle path for the middle class

Finance minister Nirmala Sitharaman on Wednesday presented the Union Budget 2023 where she chose to stick to the growth strategy that she first unveiled in 2019, stay on the path of fiscal prudence and incentivise the private sector to invest more in the economy’s productive capacity. It was her last full budget of the second Narendra Modi government. The finance minister had a tricky balancing act between stabilizing public finances and supporting India’s economic recovery, with risks from tilting too far on either side. Two underlying themes deserve attention. First, there is continuity. The budget strategy continues to focus on gradually bringing down the fiscal deficit while pivoting towards more capital spending. Second, the political economy of the budget is directed towards middle India, especially small enterprises as well as the lower deciles of the salaried class that have had a relatively bad run in recent years.

The finance minister has met the fiscal deficit target set last year, despite a large increase in the subsidy bill. This was possible because net taxes to the Union government this financial year will be around ?1.52 trillion more than what was estimated in February 2022. The ability to stick to the deficit target adds to the growing credibility of Indian fiscal policy since 2019, perhaps one reason why the bond market held its ground despite the record borrowing needed to fund the fiscal gap.

There has been some good improvement on the personal income tax front. The big move here was the increase in the rebate limit to ?7 lakh under the new tax regime. Up until now, individuals with an income of up to ?5 lakh had to pay no income tax under the new regime and the old regime. Now, it largely makes sense for everyone with an income of up to ?7 lakh to move to the new regime. Further, the government has changed the tax slabs under the new regime. For example, up until 2022-23, those with an income of ?5-7.5 lakh came under the 10% tax bracket. From 2023-24 onwards, those with an income of ?6-9 lakh will come under this bracket. This seems to be a nudge to tax-filers to move towards the new tax regime, which is simpler but doesn’t come with the deductions and exemptions like the old one does. Nonetheless, if your income is beyond ?7 lakh, whether you should be on the new regime or the old one, depends on the exemptions and deductions you claim, and your specific salary structure. The amount of money that can be invested in the Senior Citizens Savings Scheme has also been increased from ?15 lakh to ?30 lakh. The current rate of interest on this scheme is 8%. Most bank fixed deposits currently offer 7.5% interest to senior citizens. Other than this, the maximum deposit under the monthly income scheme of the post office has been doubled to ?9 lakh for a single account. These measures are welcomed.