Budget 2024: A Tightrope Walk
The incumbent government is set to present an Interim Budget on February 1, 2024 before the election season sets in. The macroeconomic backdrop is rather favourable; GDP growth projections for FY24 have been revised upwards, average CPI inflation is set to moderate, and the current account deficit remains modest. The fiscal deficit target for FY24 in absolute terms is also likely to be met, in spite of this being a pre-election year. The timing is opportune to plough ahead with continued fiscal consolidation, with all indications that the benign domestic economic environment will sustain in FY25.
The upcoming budget is set to be an interim one for the purpose of a vote-on-account, rather than a full budget, which is the norm prior to parliamentary elections. This effectively implies a sanction of parliament for withdrawal of money from the Consolidated Fund of India to meet the government's expenses, for a period of up to four months, before a full budget is presented. Given this, major policy changes are unlikely at this juncture, and the market participants should ideally moderate their expectations from the upcoming vote-on-account.
Nevertheless, the overall budget math would be closely watched, both the outturn for FY24 and what is penciled in for FY25. Of keen interest is the balance that is sought between fiscal consolidation and capex expansion, which compete with each other over the short term, even as they complement each other over the longer term. This is particularly important given the crucial role that rising government capex has played in supporting growth over the last few years.
Modest Revenue Growth
ICRA forecasts the nominal GDP growth at ~9.5 per cent in FY25. We have penciled in a moderate 11.1 per cent growth in gross tax revenues in FY25, implying a tax buoyancy of 1.2x, in line with that seen during FY15-19. We are not as optimistic around non-tax revenues and have projected a modest decline in the same in FY25, over a mildly higher-than budgeted print expected in FY24. We have assumed a disinvestment target of Rs 500 billion for FY25 in our revenue calculations, similar to the amount that was budgeted for the ongoing fiscal. A number higher than this may be considered unrealistic by the markets, given the actual realisation over the last few years, and the likely sizeable miss expected in the current fiscal even from this modest target.
On the expenditure side, we believe that the Government of India (GoI) would be able limit the growth in its revex to ~4 per cent in FY25, aided by a muted growth in its subsidy burden, albeit on a higher-than-budgeted turnout in FY24. Moreover, it is likely to pencil in an amount of Rs 600 billion for the National Rural Employment Guarantee Scheme, similar to that budgeted for FY24. However, the actual spend is likely to be much higher, as is the case in the ongoing fiscal, with the additional funding requirement likely to be met through supplementary demand for grants in the latter part of the year.
This brings us to the most anticipated item in the budget – the GoI’s capex, which has dominated headlines over the last few years. For instance, in FY19, the GoI’s on-budget capex stood at Rs 3.1 trillion, 13.3 per cent of the total expenditure and 1.6 per cent of GDP. As against this, capex for FY24 was budgeted at a massive Rs 10.0 trillion, 22.2 per cent of the total expenditure and 3.3 per cent of GDP. On account of the imminent onset of the model code of conduct, as well as a gap between the budgeted, approved and released amount under the capex loan scheme to the states, we fear that the FY24 capex target could be missed. We have penciled in a shortfall of Rs 750 billion in the FY24 capex, which would still imply a robust YoY growth of ~26 per cent.
Fiscal Deficit Target
The government had earlier set a medium-term target of restricting the fiscal deficit to around 4.5 per cent of GDP in FY26. With the fiscal deficit likely to eventually print at around 6.0 per cent of GDP in FY24, it would be prudent to attempt to bridge half the required consolidation in the coming year, and budget for a deficit of around 5.3 per cent of GDP.
Based on our estimates of receipts and revenue expenditure, we think this fiscal deficit target would allow for a budgeted capex of Rs 10.2 trillion in FY25, a relatively sedate YoY expansion of 10 per cent . While this sharp slowdown in capex growth would weigh on the pace of GDP expansion, a larger outlay would impinge on the GoI’s ability to curtail the fiscal deficit to 5.3 per cent of GDP from the 6.0 per cent expected in FY24. The tradeoff is as follows; every 10 bps of expansion in the fiscal deficit-to-GDP ratio would allow for additional capex of ~Rs 324 billion in FY25. However, this would make achieving the medium-term target in FY26 that much more challenging.
