Budget Preview: Fiscal Deficit May Be 6.1-6.2% Of GDP In FY23E

The Government of India (GoI) will present the Union Budget 2023-24 on 1st Feb'23. Although the Budget presentation is only one part of managing public finances, it continues to garner a lot of attention. We believe the GoI will continue on its fiscal consolidation path, targeting a fiscal deficit of 5.6-5.8% of GDP in FY24.

It is clear that the GoI has been very conservative in its tax receipt estimates in the past couple of years, which is in stark contrast to its earlier practice of presenting over-ambitious targets. As a result, it remains very difficult to forecast FY24BEs. In this note, we present our projections for central government (CG) finances in FY23 and FY24. Based on provisional data available for 7MFY23 (Apr-Oct'22), our calculations suggest that gross taxes can exceed budget estimates (BEs) by as much as INR4t in FY23 (same as that projected earlier). With a higher devolution and a shortfall in divestment, it means an over-achievement of INR2t in total receipts in FY23.

Based on an expected ~9% nominal GDP growth and an improved tax buoyancy of 1.3x (v/s 1.2x in the pre-COVID period), we expect gross taxes to grow 12% YoY in FY24, taking the same to a new peak of 11.9% of GDP. Assuming that the GoI sticks to its fiscal deficit target of 5.6-5.8% of GDP, it implies a 6.5-8.5% YoY growth in spending in FY24E, v/s ~9.5% growth in FY23 and the lowest in eight years.

Even with subdued spending growth, it is very likely that GoI can target capital spending at INR8.8t in FY24E (up another 17% YoY, ~20% of total spending), and rise to ~3% of GDP. As discussed earlier, however, a comprehensive analysis of public sector capex is required to arrive at macro conclusions.

Though we don't expect any major policies and announcements in this Budget, the continuation of the improved quality of CG spending will be highly welcome. As the target of paring down the fiscal deficit to 4.5% of GDP by FY26 remains a tall task, a reiteration of this will be assuring.

(The above is taken from a report by Motilal Oswal Financial Services)