This Budget would have the daunting task of
progressing towards consolidation after the covid related fiscal push. On the
other hand, an eye needs to be kept on the economic growth in an atmosphere of
slowing global growth and tightening domestic financial conditions. On a
strategic level, the broad reforms process should continue with outlays earmarked
for rural development, boosting manufacturing, employment generation, and capacity
building through infrastructure. Despite this being the last Budget before
general elections, we do not anticipate much in terms of tax dole outs for the
masses.
For FY24E we anticipate the Budget deficit to
increase to INR 17.8 tn, GFD/GDP to print at 5.9% (after attaining the 6.4%
target for FY23BE). Net and gross borrowings are likely to increase in FY24E to
INR 11.7 tn and 15.4 tn respectively. Despite RBI pausing after another 25bps
hike in February 2023, we see a scope for yields to rise in H1FY24 towards
7.60-7.75% as centre targets to front-load borrowings in H1.
The upcoming Union Budget will require
policymakers to ensure the fiscal impulse is maximized to improve potential
growth, while signaling adherence to medium-term fiscal sustainability. This
will require continued financial sector reforms, better resource allocation,
and funding by aggressive asset sales via functional infrastructure
monetization, disinvestment, and strategic sales, among others.
We project FY24E GFD/GDP at 5.8% after 6.4% in
FY23E, implying net and gross borrowing at whopping Rs12trn and Rs15.1trn,
respectively, adjusted for Covid-GST comp. loans. The scope for a blatant populist
budget looks bleak amid moderating tax revenue, high committed revex, and
market loans.
On the revenue side, lower tax buoyancy could
be partly countered by higher RBI dividend and still healthy assumption of
divestment proceeds. We watch for possible changes to capital gains tax structure
and new personal tax regime, extension of concessional 15% tax rate for new
manufacturing units, and higher import tariffs on PLI-related products.
Expenditure focus is likely to be on rural,
welfare, infrastructure, PLIs, and energy transition. Capex spend will remain
significantly higher than pre-pandemic (2.9% of GDP), especially amid larger
fiscal multiplier on employment and growth and still-lacking private capex.
FY24 budget on 1 February 2023 is likely to be
a mundane reading showing good fiscal progress in FY23 (6.1% of GDP fiscal
deficit vs. 6.4% budget) and plans to further lower the deficit in FY24 (5.7%
of GDP) by rationalizing subsidies. The central government is likely to
conserve resources, targeting low double-digit growth in allocation to capex, rural
development, social services so that outcomes don’t suffer due to cost
inflation.
Central government’s fiscal deficit is likely
to fall further to 5.7% and will be on track to achieve 4.5% of GDP by FY26.
The 0.4% of GDP fiscal consolidation is supported by INR 1.5 trillion drop in
food and fertilizer subsidies due to merging of food subsidy under PMGKAY with
NFSA and correction in global fertilizer prices. This outcome along with modest
tax buoyancy (12% YoY growth) should give the government space to target low
double digit spending growth in rural development and capex.
·
Tinkering with personal income
tax slab to provide relief on real disposable income.
·
Expand scope of Production
Linked Incentive (PLI) schemes and green hydrogen.
·
Bump-up allocation for rural
development and social welfare to ensure outcomes don’t suffer due to cost
inflation.
·
Target double digit capex with
increase in capital allocation to new DFI and special long-term loan to states
for capex.
·
Increase scope of asset
monetization pipeline.
·
We expect fiscal consolidation
to be gradual and are building in a fiscal deficit of 6.2% of GDP in FY24 vs.
6.4% of GDP in FY23.
·
While we do not entirely rule
out the government factoring in a slightly lower fiscal deficit of 5.9-6% of
GDP for FY24, we believe that under-estimation of revenue expenditure or
aggressive revenue estimates may not be palatable for markets.
·
However, we also note that in
recent years, the government has erred on the side of caution with its revenue
estimates. We are factoring in tax revenue growth of 11.5% for FY24, just a tad
higher than our nominal GDP growth of 10.5%.
·
We expect the focus on
government capex to stay and factor in 15% growth in FY24. We believe that
Railways and Roads will be the largest beneficiaries of incremental government
capex.
·
Overall, we factor in revenue
expenditure growth of ~7.5% in FY24 over the revised estimates for FY23. Ahead
of Lok Sabha elections in CY24 and given the recent rural distress, we expect higher
allocation to rural schemes with focus on rural infrastructure development.
This will partially offset lower fertiliser subsidies and some moderation in
food subsidies.
·
We expect higher payouts under
various government schemes to ease the burden of inflation for the ‘Bottom of
the Pyramid’ strata. This may include higher payouts under the PM Kisan Yojana announced
in the budget or during the course of FY24.
·
We expect the budget to remain
focused on improving India’s competitiveness as a manufacturing hub and
reducing logistics costs. Incentives for industry are likely to be oriented towards
encouraging investments in clean and green technologies.
·
We are penciling in net
borrowing of ~Rs12.1tn and gross borrowing of Rs16.5tn in FY24, which along
with the inflation focus of RBI will keep bond yields range-bound at ~7.3% in
the near term.
The government has reiterated its commitment to
India’s fiscal glide path which targets a 4.5% fiscal deficit by FY26. We thus
expect a lower figure in the FY24 budget estimate (BE) vs. the 6.4% deficit in
FY23BE. Additionally, for India to become a US$ 5tn+ economy from the current ~US$
3tn, continued momentum in the investment cycle is vital. Therefore, we believe
the capex support seen in the past two budgets will continue. The FY23BE of Rs
7.5tn capex is likely to be met and should see a bump up of 10-15% to Rs
8.5tn-9tn in FY24BE, with outlays in the usual sectors of roads, highways, defence
and railways. We believe the production-linked incentive (PLI) scheme could be
extended to newer sectors, while affordable housing would also stay in focus.
·
Fiscal normalisation post Covid
expected to remain a core theme of the FY24 budget; fiscal glide path likely to
be maintained.
·
Budget could stay geared
towards improving living standards of the poor while continuing to build
necessary infrastructure.
·
In line with past trends, we do
not expect the budget to spark a significant move in the stock market.
FY24 Union Budget is likely to be a tightrope
walk, considering its fiscal guidance, and the 2024 union elections. We
estimate fiscal deficit for FY24 at 5.8-6.0% and FY23 at 6.2%. Muted nominal
GDP growth (due to global slowdown and low deflator) will constrain tax revenue
and government spending, compared to the strong pace in the last couple of
years. Thus, the government’s innovation will be tested – to deliver an
effective budget, encompassing capex, rural, social, policy incentives,
subsidies, and tax/growth buoyancy. In case the government adopts an easy
approach to the fiscal path, across-the-board expansion can be expected and
delivered.
In the upcoming budget, we anticipate continued
focus on PLI incentives (for new sectors), Atmanirbhar Bharat (to enhance
manufacturing, exports, while managing imports), sustainability (supply/demand
push towards renewable energy and alternative technologies), and infrastructure
expansion (defence, railways, ports, logistics, and roads). The government
wants to encourage the adoption of the new income-tax regime, thus incentivization
is likely. Fiscal support to rural India will continue (adjusting for food and fertiliser
subsidy); we will be watching for any meaningful stimulus (low probability considering
fiscal constraints).
Fiscal deficit for FY22 should be lower than
budgeted at 6.2% vs. 6.4% BE, helped by higher nominal GDP growth, tax
buoyancy, and expenditure management; non-tax revenue will fall short due to
low RBI dividend and disinvestment. Higher food/fertiliser/petroleum subsidy
will result in revenue expenditure surpassing BE. Capex targets will be largely
met. For FY23, we expect muted revenue expenditure (4-5%) growth, and decent
capex growth at 7-8%. Lower-than-FY23 subsidies will generate scope for other
rural and social expenditure. Our tax growth estimate is muted (5-6%) due to
high base and low inflation and growth momentum. We are not very upbeat on
non-tax revenue either. FY24 fiscal deficit at 5.8% offers limited scope of
spending enhancement, while 6% fiscal deficit can aid expansion, catering to
varied sections in an election year.
