Budget 2023: Low inflation numbers are unlikely to have any major impact on the Budget 2023, say economists. Although the inflation rate has touched a one-year low, it is too soon for the government to consider these numbers and introduce any measures, economists pointed out. But they asserted the fact that the downtrend of the inflation rate has just started and if the rate continues to fall as anticipated, then the impact is likely to be visible in the Budget of 2024.

Both Consumer Price Index (CPI) and Wholesale Price Index (WPI) touched an all-time low in the last one year in December 2022, the official data shows.

“But this particular number of inflation won’t change things drastically for the upcoming budget. Budget expectations and fiscal math would broadly remain unchanged,” added Sakshi Gupta, senior economist, at HDFC Bank.

Budget 2023: Inflation rate and Fiscal Math  

Economists stated that inflation coming down has both positive and negative impacts on fiscal math. While on one hand, with inflation coming down, people tend to spend more leading to an increase in the sale of items that leads to employment opportunities. On the other hand, low inflation impacts tax collections and nominal GDP growth.

“High inflation periods tend to aid nominal tax revenue growth and nominal GDP growth. We see this in FY23 and FY22 where a combination of growth recovery and inflation supported nominal GDP growth and nominal tax revenue growth. Nominal GDP growth in both these years is strong at 19.5 per cent in FY22 and 15.5 per cent estimated in FY23. Nominal gross tax revenue growth was also strong in both these years at 33.6 per cent  in FY22 and an estimated 14.5 per cent in FY23,” added Gaura Sengupta, economist.

Budget 2023 and Low inflation: An analysis  

Despite low inflation, the concern for the government is not yet over. As pointed out by several economists, lower inflation in FY24 means the nominal GDP (that is inflation unadjusted) will be lower. With nominal GDP being low, the government has to keep the fiscal deficit under control and so it cannot have a very large numerator which is a total budget expense in this case, said economists.

The government has to reduce its expenses to follow the fiscal deficit glide path. Thus, the center won’t have much fiscal space to do a lot of spending. Lower inflation will affect GST collection or indirect tax collection. So, when there is a concern about GST collection being low in this fiscal, it is unlikely that government will introduce any major tax exemptions or tax benefits even for direct tax collection. So, the government may not increase the income tax, but it is unlikely that there will be any major exemptions too. Only, there could be some revision in the income tax exemption limit to Rs 5 lakh from Rs 2.5 lakhs, and an increase in the standard deduction from Rs 80,000 to Rs 50,000 is anticipated by the economists.

More than the impact on the domestic market, low inflation will help the Indian economy from a global perspective, highlighted economists.  “On the expenditure front the moderation in inflation pressures, especially global energy prices will lower subsidy expenditure in FY24, which had risen significantly in FY23. We estimate savings from subsidy expenditure at Rs 1.6 trillion in FY24,” added Sengupta of IDFC First Bank.

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