Budget 2023-24: Modest Fiscal Consolidation Continues

The Union Budget 2023 was presented on 1st Feb'23 amid high expectations. Since this was the last full budget before 2024 General Elections, it was expected that the government could announce some income support for the rural sector or implement some measures to boost consumption growth in the economy. However, the government did not give in to these expectations and continued with its investment-led spending growth strategy along with modest fiscal consolidation. Although the Economic Survey projected a nominal GDP growth of 11% YoY in FY24, the Budget assumed 10.5% nominal GDP growth next year.

Fiscal deficit budgeted at 5.9% of GDP in FY24BE, kept unchanged at 6.4% of GDP in FY23RE

Contrary to our expectation of lower-than-budgeted deficit in FY23, the Government of India (GoI) kept it unchanged at 6.4% of GDP in FY23. This means that fiscal deficit was revised up to INR17.6t in FY23, from BE of INR16.6t. At the same time, the GoI has budgeted the deficit at 5.9% of GDP (INR17.9t) for next year, which is in line with the market consensus but higher than our expectations of 5.7%. Total liabilities of GoI are likely to rise to 56.2% of GDP in FY24BE from 55.9% of GDP in FY23RE owing to weaker growth and modest consolidation. Moreover, although the bonds market cheered the lower-than-expected gross market borrowings (albeit
net borrowings were in line with the market consensus), the GoI has assumed another INR4.7t worth of financing from small savings. The latter seems highly ambitious to us, and any shortfall in FY24E could mean either lower spending growth and/or higher market borrowings.

GoI continues to focus on better spending quality

At a time, when there were high expectations to announce measures to support the rural sector, the GoI kept revenue expenditure growth at minimal (just 1.2% YoY), and propelled capital expenditure (capex) strongly for the third consecutive year. Excluding subsidies, revenue expenditure is budgeted to grow 7% YoY in FY24BE, marking the slowest growth in eight years. GoI's capital spending, however, is budgeted to grow 37.4% YoY in FY24BE following a 23% YoY growth in FY23RE. The government's capital spending has surged almost 2.5x in the past three years to INR10t in FY24BE from INR4.2t in FY21. Since total government expenditure is budgeted to grow just 7.5% in FY24BE, the share of capital spending is budgeted to rise to 22.2% of total spending, marking the highest share in 18 years (up from just 12-13% in pre-Covid years).

(The above is taken from the report of Motilal Oswal Financial Services )