Budget 2023: Realistic Budget Math, Say Economists

The union budget was a balancing act between fiscal consolidation and continuing support for growth. The fiscal math, though optimistic in parts, appears realistic and credible, according to economists.

"Are the budget numbers overly optimistic? On the margin, we think yes," said Sonal Varma and Aurodeep Nandi, India economists at Nomura. Growth is expected to slow materially in fiscal 2024, owing to a mix of developed market recessions and the lagged impact of tighter monetary policy, with real GDP growth at 5.1% year-on-year in FY24 and nominal GDP growth at around 8.5–9.0%. The resulting lower nominal GDP growth means tax revenues are likely to disappoint, the Nomura economists said.

"In addition, we foresee political pressure for countercyclical spending, especially given that the current plans suggest revenue expenditure growth of only 1.2% year-on-year in FY24," they said.

The government can still meet its 5.9% deficit target, but it will have to cut back on its projected capex target. This is possible, but if growth slows, then policymakers may prioritise growth over fiscal consolidation, which is a risk in H2 FY24. "For now, the government has projected a growth-oriented budget without rocking the macro boat," these economists added.

"The budget presented on Wednesday was largely in line with our expectations from when we affirmed India’s ‘BBB-’ rating with a stable outlook in December last year," said Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings.

As such, it does not significantly change the sovereign credit profile. India’s fiscal deficit and government debt ratio are high relative to peer medians, but the government’s emphasis on reducing the deficit will help stabilise the debt ratio over the medium term, he said.

The government’s continued emphasis on ramping up capex spending should provide a fillip to both near- and medium-term growth.

"We believe India is well-placed to sustain higher rates of growth in the medium term than many of its peers, with the capex drive helping to underpin this view," Zook said.

Still, it will likely be challenging for the government to achieve its 4.5% of GDP deficit target by FY26, as achieving this target implies an additional 0.7% of GDP consolidation in each of the two subsequent fiscal years, he said. Nevertheless, the commitment to reducing the fiscal deficit is a positive signal for debt sustainability.

"Over the next five years, we forecast India’s government debt-to-GDP ratio to stabilise at around 82%," he said. This is based on a continued path of gradual deficit reduction as well as robust nominal growth of around 10.5% of GDP. "Our robust growth outlook for India is a key factor supporting the stabilisation of the debt ratio in the absence of stronger deficit reduction."

While the nominal GDP growth assumption of 10.5% year-on-year for FY24 seems broadly reasonable, the tax buoyancy estimates look a bit rich, said Pranjul Bhandari, chief economist at HSBC Bank. But there could be savings on the expenditure side; for instance, a slightly lower capex on the back of implementation issues would eventually help to meet the fiscal deficit target.

Gross market borrowing came in a shade lower than some had expected, although its funding may turn out to be different from what was budgeted. India’s public debt has fallen from pandemic highs but is likely to remain in the 85% range for the next few years. "We expect a negative fiscal impulse on growth, although higher capex could offset some of the drag," Bhandari said.

The central government’s Budget 2023 was growth-supportive while sticking to a modest glide path for consolidation, said Radhika Rao, senior economist at DBS Bank. The underlying math was reasonable as it factored in the upcoming moderation in nominal GDP growth and lower tax buoyancy while prioritising long-gestation capex spending.

Encouragingly, the revenue spend (net of subsidies and interest payments) versus capital expenditure ratio is set to halve from three to four years ago, boding well for the quality of expenditure.