Budget 2023: Trade-off Between Growth Vs. Fiscal Consolidation

The upcoming budget faces acute policy trade-offs between nurturing a nascent growth recovery and diminishing fiscal space with challenging debt dynamics. FY24 Union Budget will be presented against the backdrop of renewed uncertainties around global and domestic growth, tighter financial conditions, and the Union elections in CY24. However, even as additional support to some vulnerable segments of the economy is warranted, a delicate balance needs to be maintained, ensuring the fiscal impulse is maximized to boost potential growth, even as policy adherence to medium-term fiscal sustainability is signaled.

This would require: (1) the expenditure-to-GDP ratio to remain healthy; and (2) front-loaded investment-focused stimulus, especially amid its larger multiplier effect on growth and employment. This necessitates innovative reforms, better resource allocation, and possible fiscal funding by aggressive asset sales in the form of existing functional infrastructure monetization, disinvestment, and strategic sales, among others. However, going ahead, we believe some of these windfall gains may face pressure from stake sales of the government's large holdings, which are mainly concentrated in commodity companies and the utilities sector.

Steady consolidation ahead: FY24E GFD/GDP poised to consolidate to 5.8% vs. 6.4% in FY23E

Amid various push and pull, FY23 GFD/GDP could just about balance at 6.4%. Positive buffers such as robust tax collection and higher nominal GDP would get offset by (1) higher payouts than budgeted on food and fertilizer subsidies, (2) miss on ambitious divestment targets, and (3) lower RBI dividends. For FY24, we model steady
consolidation of 0.5-0.6% and see GFD/GDP at 5.8%. The scope for going out-and-out populist looks bleak amid moderating tax revenue, high committed revex, and heavy market borrowings. Asset sale execution will remain the balancing key, while the RBI's dividend could be 3x of FY23. We pencil in divestment and RBI dividend at Rs650bn and Rs1trn, respectively. We assume 10.5% nominal GDP growth. A more aggressive nominal GDP assumption in the budget could make government balances look optically better.

(Excerpts from a report by Emkay Global)