Union Budget 2023 augments capex without sacrificing fiscal consolidation

As always, expectations were rife from the Union Budget. The Budget for 2023-24 has walked a fine line, providing a big boost to growth-inducing capex while attempting a fair degree of fiscal consolidation.

The former was much needed, because while India is growing faster than the other major economies, the pace of expansion is decidedly uneven across sectors, and a global slowdown is looming. Fiscal consolidation assumed as much urgency, as the deficits remain much higher than pre-pandemic levels, and interest payments usurp a large part of the hard-earned revenue base of the government.

The Budget Speech did seem to tacitly acknowledge that India’s high growth and more formalised economy conceal an underlying unevenness, leading to the government’s continuing focus on inclusive development, the rural sector and support for various marginalised groups.

The Government has enhanced its capex by a sharp and welcome 37 per cent to a higher-than-expected Rs 10 trillion, which should help to bolster GDP growth and stave off external sector headwinds. Allocations have been enhanced considerably for core sectors like rail and roads, with support extended to other sectors such as aviation and travel as well. Mandatory scrapping of old government vehicles is set to support replacement demand in the auto sector. In addition to this, the Budget has prioritised green initiatives by providing Rs 35,000 crore for capital investments towards energy transition and net zero objectives, and energy security by the Ministry of Petroleum & Natural Gas.

Moreover, focus on increased digitisation augurs well for the IT services industry as well as the data centre industry. Further, the rejuvenated Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) scheme would drive credit to MSMEs, going forward.

About a fifth of the increase in capex is on account of the enhanced interest free capex loan to state governments. The offtake of this scheme was modest in H1FY23, leading to a cut in its allocation for the current year. We are hopeful states will build in the larger amount of Rs 1.3 trillion into their respective FY24 budgets after their experience in the ongoing year. This could enable them to frontload their capex in FY24, which should help enhance GDP growth in the coming fiscal.

In addition to the sharp increase in the budgeted capex, the CPSE’s Internal and Extra Budgetary Resources (IEBR) are projected to rise by a healthy 22 per cent in FY24. Adding this to the GoI’s own capex, the total capex of the Centre and the CPSEs (IEBR) is expected to rise by nearly a third to Rs 14.9 trillion in FY24, equivalent to an exuberant 4.9 per cent of GDP.

The high capex growth has benefitted from a cut in the allocations for fertiliser and food subsidies, which had ballooned in FY23, partly on account of global factors and uneven domestic growth. As a result, the revenue expenditure growth is subdued at sub-2 per cent.

Additionally, the GoI has increased the allocation for PLI schemes in FY24 vis-a-vis FY23, with continued allocation for pharmaceuticals, large scale electronics manufacturing, food products, auto and auto components and drones and drone components segments.

The income tax changes, which were eagerly awaited by the salaried classes, are likely to incentivise the shift to the new tax regime. Tax revenue growth has been pegged at a slightly optimistic 11.7 per cent, higher than our forecast of nominal GDP expansion of 10 per cent for FY24. Similarly, the non-tax revenue and disinvestment proceeds budgeted for FY24 appear mildly higher than what we had pencilled in.

Admittedly, the Union Budget 2023-24 has indicated a mild rise in the GoI’s fiscal deficit to Rs 17.9 trillion in FY24 from Rs 17.6 trillion in FY2023. More importantly, as a percentage of GDP, it is expected to moderate appreciably to 5.9 per cent from 6.4 per cent in FY23. Besides, the quality of the fiscal deficit is also set to improve in FY24, with capex accounting for a much larger share of the same vis-a-vis FY23.

Moreover, although the GoI’s gross borrowings are set to rise, they are broadly in line with market expectations, which has helped cool yields.

With CPI inflation having fallen below the upper threshold of the Monetary Policy Committee’s medium-term target range of 2-6 per cent, and the Budget sticking to fiscal consolidation path, there is a distinct possibility of a pause in the upcoming February 2023 review of Monetary Policy.

The author is MD and Group CEO, Icra Limited