Budget 2023: Trade-Off Between Capex And Consolidation

Budget 2023 will be presented against the backdrop of renewed uncertainties around global and domestic growth, tighter financial conditions, and the general election in 2024. It will require policymakers to ensure the fiscal impulse is maximised to improve potential growth, while signaling adherence to the glide path.

It is a tough ask in a year where nominal GDP growth is likely to come off year-on-year, and a bunch of receipts like divestment or dividend are likely to be lower. Will the savings on key expenses like subsidies provide the firepower to keep both the industrialist and the rural consumer happy? How will the math work out?

Here are the key heads and the numbers within that I will be watching:

Nominal GDP Growth

The government had estimated a nominal GDP growth of 11.1% in 2022-23 (that is real growth plus inflation). Against that backdrop, a number between 10.5% and 11.5% is estimated. A number much higher or much lower may be out of sync with market expectations or beliefs. This number is important from a perspective of the government's assumption of growth and inflationary pressures in a year where the western world is likely going to suffer steep growth pangs and an opened up China is likely going to show strong expansion. A more aggressive nominal GDP assumption in the budget could make government balances look optically better

Fiscal Deficit

The consensus is to expect a lower figure in the budget estimate for FY24 versus 6.4% for FY23. Most economists and experts that we spoke to expect a number of 5.9%. If it's below the 6% mark, it will show that the government is serious about maintaining fiscal discipline. A series of short conversations with some of the biggest global corporate names in Davos suggests that sticking to the glide path would be a very important statement for India in an interconnected global economy.

Capex

FY23 budget estimate of Rs 7.5 lakh crore capex is likely to be met and should see a bump up of 10-15% to Rs 8.5-9 lakh crore in FY24BE. Outlays in the usual sectors of roads, highways, defence and railways are anticipated. There is a chance that the  production-linked incentive scheme could be extended to newer sectors, while affordable housing would also stay in focus. This would be an important aspect of this budget, as the capex focus would indicate whether the government is putting money behind the push to get manufacturing and industrial growth going in order to tackle the issue of jobs. A deviation from a strong capex push would mean the government is succumbing to pressures of appeasement in a pre-election year.

Subsidies

Food subsidy in FY23BE was Rs 2.9 lakh crore, including Rs 1.5 lakh crore for free food. There is an expectation that the food subsidy as a percentage of GDP would be lower in the FY24 estimates with no expansion in scope envisaged. Similarly, fertiliser subsidy, which overshot FY23BE of Rs 1.1 lakh crore to more than Rs 2 lakh crore, is expected to moderate. Lower year-on-year subsidy outgo will give room to the government for spending on other rural and social segments. In a year when receipts are not going to be very strong due to lower growth versus FY23, savings from subsidies would play a vital part in funding the social segments so that the capex push is not compromised.

Market Borrowings

Most experts expect FY24 net borrowings to be Rs 12-12.5 lakh crore, compared with Rs 9.3 lakh in FY23. This would mean that around two-thirds 3rd of the fiscal deficit will be funded by market borrowings. Keep in mind that the scope for going for an out-and-out populist texture to the budget looks bleak amid the heavy market borrowing number in addition to the moderating tax revenue in FY24. A keen eye would be on any easing on operational guidelines for FPI trade settlement in government securities to expedite global bond index inclusion.

Niraj Shah is Executive Editor at BQ Prime.