Budget 2023-24: Leaning more on capex, while tightening the fiscal belt

Budgeting for a post-pandemic economy

The government continued its march towards fiscal consolidation, comforted by a broad-based recovery in the Indian economy until now. It set a target of reducing fiscal deficit to 5.9% of the gross domestic product (GDP) in fiscal 2024, from 6.4% (revised estimate or RE) this fiscal. It also reiterated its commitment to bring the fiscal deficit below 4.5% of GDP by fiscal 2026.

Though the current fiscal has witnessed a broad-based recovery and resilient domestic demand so far, headwinds from slowing global growth and tighter financial conditions threaten to hurt the country’s economic prospects in fiscal 2024.

In this milieu, the budget has tried to strike some balance between fiscal consolidation and growth, by continuing its focus on capital expenditure and creating fiscal space for that by cutting revenue expenditure. In addition, it has eased the tax burden on the middle-income segment to improve consumer confidence and promote a more inclusive recovery.

How macroeconomic developments will shape fiscal consolidation

• Slowing growth to impact revenue collections: We expect India’s real GDP growth to taper to 6.0% in fiscal 2024 from 7.0% this fiscal. Slower global growth will hit India’s exports, while tight financial conditions in the country could weaken domestic demand, cumulatively leading to lower revenue growth compared with this fiscal.
• Moderating inflation a mixed blessing for the budget: We expect inflation based on Consumer Price Index (CPI) to moderate to 5% in fiscal 2024 from 6.8% this fiscal. Inflation based on Wholesale Price Index (WPI) is expected to drop at a faster pace to ~3%, due to a strong base effect and a decline in global commodity prices, thereby reducing government subsidies on food and fertilisers relative to fiscal 2023.
  
• However, lower inflation, coupled with slower real GDP growth, implies slower nominal GDP growth. The government has estimated nominal GDP growth of 10.5% in fiscal 2024, compared with 15.4%¹ in fiscal 2023. This will reduce tax collection momentum. A sharp drop in WPI inflation in particular hits Goods and Services Tax (GST) collections, which are closely linked to wholesale prices.
  
• Tight financial conditions to weigh on borrowing costs: Yields on government securities could face pressure from elevated interest rates globally and tighter domestic financial conditions. The US policy rate is expected to cross 5% by June 2023 and remain at a decadal high through the year. This could maintain pressure on short-term capital flows to Indian debt markets.
  

¹ First advance estimate by National Statistics Office