Union Budget 2023: Expect modest fiscal consolidation

Budget announcement is critical for the bond market, as it directly affects bond supply for the year ahead. The fiscal stance adopted by the government and the roadmap for fiscal consolidation provide inputs for monetary policy, which in the current context, is on the cusp of transitioning from rate hikes to pause. The equity market actively keeps an eye on taxation reforms and the implications thereof. The market also watches out for funds allocated, or measures taken to alter infrastructure, rural and consumption momentum.

FY24 Union budget will be placed against the backdrop of a) need for fiscal consolidation amidst rising private credit, b) likely growth moderation in FY24 which could dent tax collection c) need to address the income weakness in middle-income households, while d) not losing an eye on multiplier effects of capex boost. Thankfully though, a lot of accounting clean-up has already been done and payment backlogs have been met with.

The commencement of the Russia-Ukraine war had shaken the budget math last year just a few weeks after it was drafted. Commodity prices, primarily food and energy, shot up, necessitating some rollback in petrol/diesel excise duties, a continuation of free food grain distribution, and higher subsidy for fertilizer and energy. The last two years of uncertain global backdrop would be an important learning as North Block prepares itself for the 2023 Union budget. Being conservative in their tax and growth assumptions had paid them well in meeting the fiscal deficit and hence bond supply targets without compromising infrastructure plans or their ability to absorb the macro shocks. It would be interesting to see if the government sticks to its conservative approach in FY24 as well.

Taking a stock of FY23 numbers, strong tax collection will partly help meet higher than budgeted subsidy outgo in FY23. We expect net receipts for Centre (tax+ nontax + disinvestment less tax devolution to states) could be Rs 1.5 trillion more than budgeted. On the other hand, the finance ministry sought parliamentary approval to undertake an additional spend of Rs 3.25 trillion primarily under subsidies, rural development, and road and railway capex. There could be a few pockets of savings in revenue items, though capex targets could be broadly met with. To sum up, total expenditure could overshoot the budget by ~ Rs. 2.3 trillion.

FY23 fiscal deficit would broadly be at the budgeted target of 6.4% of GDP (at best 10bps lower), implying the absolute deficit could be wider than budgeted. Higher than budgeted nominal growth outcome in FY23 provides Rs 900 bn of expenditure space. We do not expect any negative surprises in G-sec or T bill supply for the remaining two months of FY23. Though, muted collection in NSSF is an additional risk. As such, we expect any additional financing requirement for FY23 (either due to the higher absolute fiscal deficit or due to shortfall in NSSF collection) is likely to be met via cash drawdown.

We expect the fiscal deficit to consolidate to 5.8% of GDP in FY24. Gross tax revenue growth is likely to moderate ~7% in FY24 (vs. estimated 11% in FY23). While direct tax and GST buoyancy could stay healthy in FY24 and RBI dividend could improve, we could see moderation in other components of indirect taxes, marginally lower PSU dividend and spectrum-related telecom receipts. The Disinvestment pipeline has also cooled off after the stake sale.Government infrastructure thrust is important to crowd in private sector capex and take India to a US$ 5tn+ economy from the current ~US$ 3tn. Therefore, we believe the capex support seen in the past two budgets will continue. Capital outlay allocation is likely to be scaled up to Rs 10 trillion (3.0% of GDP) vs Rs. 7.5 trillion in FY23 (2.7% of GDP). Resultantly, revenue expenditure could likely consolidate by 90bps in FY24 primarily on account of lower subsidy outgo (nearly Rs. 2 trillion lower than FY23). Post-COVID, we have seen a healthy skew in the Centre’s spend towards capex over revenue spending.

In terms of actionable, there could be custom-duty tweaks to support PLI. There are increased expectations around increasing income tax exemption limits to support household income. State capex loan could rise as a host of significant capex-oriented sectors (urban infra, water, electricity, education, and healthcare) falls under state/ concurrent list where active state participation is needed. Thrust to green transition would likely receive an increased mention in the upcoming budget.

Despite fiscal consolidation, gross and net market borrowings could rise to ~Rs 15tn and 12tn respectively as NSSF support to the funding deficit reduces. We would also keep an eye on resources raised via extra-budgetary resources which have been kept under check for the last two years. Keeping it contained in FY24 too would also be critical to determine the cost of funds trajectory in the coming months.

(The author is CFA & Senior Economist, MF)