This is the last full budget of the Government

Earlier this week, Finance Minister Nirmala Sitharaman expressed solidarity with the huge middle-class population in India, as she gears up to present her fifth consecutive Budget. She was trying to address a large slice of the political economy, which is growing exponentially, making India one of the largest consumer markets in the world.

India with its 800 million internet users is one of the largest digitally connected democracies in the world, which can put many richer nations into a moment of self-doubt. A majority of this digitally connected population is what is loosely defined as the middle class in India, i.e., who have disposable income to spare, after taking care of their monthly expenses and, therefore, the money can be spent on various specs of the economy such as travel and leisure, hospitality, entertainment, etc.

Sitharaman knows quite well that a huge chunk of this middle class is also a voter base, for her government for the year 2024. Therefore, the expectations of a prudent Budget, without big ticket reforms, with an eye on rural as well middle class , seems reasonable.

The government in the upcoming Budget is most likely to introduce more capex primarily in social, education and healthcare sectors. This proposed capital expenditure is being planned to keep the economy growing, in a year, crucial before general elections.

Yet the capital needed for the expenditure is limited, as except

for tax collections, which have shown a month on month jump for nearly a year now, the government has little else money. The external world, primarily the prosperous nations (which are major drivers of world economy), are reporting high inflation due to the rise in fuel costs as a fall out of the war in Ukraine.

The high inflation has forced central banks of all these nations to increase the bank rates. This means after having near zero interest rates for many decades the numbers now are looking tempting for many fund managers to invest in their local markets.

The second way of generating money for the capital expenditure could be through asset monetisation or disinvestment. Now, the government’s window for quick asset monetisation is limited, in the upcoming fiscal year, as it will clash with the political economy. The government has in the past two budgets spelt out the intention of divesting two large public sector banks. But this seems unachievable in the upcoming fiscal, given the stiff resistance it may face from the bank unions.

A few of the states have restored the Old Pension Scheme, thereby putting many decades of financial burden on their future generations. The only option left for the government in bank privatisation could be IDBI, which can bring in some money, provided the market conditions are right and the global economy, including China don’t slide further. The other proposed disinvestment of Shipping Corporation of India, Concor, etc., have been in the pipeline for some years.

This means the government may have to look at the third option of raising revenues through direct and indirect taxes for meeting the capital expenditure in an election year, i.e., assembly elections in major states slated for 2023, followed by general elections in 2024.

This brings us back as to why Sitharaman chose to highlight and empathise with the middle class earlier this week. She knows that she can’t increase any taxes for the middle class, including the salaried, during this crucial year. She has to put some money into the hands of the electorates. This means effective handling and possible recalibration of personal income tax rates. She can’t increase taxes for corporations, as it can further dry up private sector investment. Her challenge will be to maintain a healthy balance between individual expectations and a sound budget in an electorally crucial budget.

(The author is a foreign affairs commentator)