A look at key tailwinds and headwinds for FM Sitharaman ahead of Union Budget 2023 | The Financial Express

A look at key tailwinds and headwinds for FM Sitharaman ahead of Union Budget 2023

As Finance Minister Nirmala Sitharaman gets ready to present her 5th union budget, here is a look at the key headwinds and tailwinds for the government ahead of the last budget before 2024 general election.

Budget, Budget 2023, Union Budget, Nirmala Sitharaman
Budget 2023 presentation comes ahead of a busy state poll calendar in 2023, followed by general elections in 2024, implying various economic and political compulsions.

By Radhika Rao

During the pandemic, additional spending needs and adverse economic impact on revenues pushed fiscal deficits sharply higher. The centre’s deficit jumped from -4.7% of GDP in FY20 to peak at -9.2% in FY21 and is thereafter expected to return to -6.4% in FY23. The FY23 fiscal math has benefited from a host of drivers, including strong nominal GDP growth of around 16% vs budgeted 11%, above target tax collections due to better growth, reopening boost, formalisation, and tighter compliance. The cushion provided by an overshoot in revenue projections and stronger than budgeted nominal growth will help absorb higher spending needs, helping to stick with the budgeted deficit target this year.

The FY24 math might see a few of these tailwinds dissipate. First will be a more moderate nominal growth backdrop, with our assumption at 10% YoY. An interplay of dissipating boosts from the reopening dynamic from the pandemic, high cost of financing, base effects, and a tougher global environment will moderate the pace of pick-up in growth in the rest of the current fiscal year and the next. While the lagged impact of the 2022 reopening and festive tailwinds coupled with better employment generation will help, household savings have returned to normalcy.

Nominal goods exports carry a strong positive correlation with the demand-side driver, i.e., global imports, with a slowdown in the latter to weigh on trade performance, with some tail-end impact on the private investment cycle. Secondly, this Budget presentation comes ahead of a busy state poll calendar in 2023, followed by general elections in 2024, implying various economic and political compulsions.

Despite these overarching demands, macro stability will assume importance in a year of high US interest rates and tight global liquidity. We expect the centre to stick with the fiscal consolidation path and not indulge in outright measures to boost short-term consumption, helping to keep additional spending and incremental inflationary impact in check. Instead, moves might include fine-tuning existing measures, reallocating resources while scaling back covid-related spending, and more targeted expenditure besides focusing on medium-term demand boost via higher manufacturing share and capex contribution.

We expect the upcoming FY24 Budget to peg the deficit at -5.9% of GDP vs FY23’s -6.4%. States’ fiscal strain has also risen, with deficits shooting up to -3.8% of GDP in FY21 before easing to -3% this year. For FY24, the states’ combined deficit is estimated at -2.7%.

The need to spur a revival in the investment cycle still rests on the public sector. A slowdown in global growth and tighter financial conditions emerge as speedbumps for private sector activity. The focus will also be on public sector capex contribution, including state governments and central public sector enterprises. The move towards higher transparency in the budget math by onboarding off-budget spending (e.g., FCI) has translated into an increase in the share of the centre’s capex whilst moderating that of the CPSEs, leaving overall public sector growth largely steady. Next, state governments’ capex spending will also call the shots, which for instance, has been modest yet far in FY23.

Participants will look for medium-term macroeconomic projections, including the revised Fiscal Responsibility and Budget Management Act (FRBM). In the FY22 Budget, the government projected the fiscal glide path to lower the deficit to -4.5% of GDP by FY26, implying an average of 60bps reduction in the deficit annually.

We expect the target to be maintained to signal that the authorities are keen to preserve ongoing fiscal consolidation but without adverse cutbacks, which will be negative for growth. The nominal GDP, on average, is likely to be higher than nominal borrowing costs (10Y as proxy) in FY24 for a second consecutive year, supportive of the debt sustainability ratios.

(Radhika Rao, Senior Economist & Executive Director, DBS Bank Singapore. The views expressed in the article are of the author and do not reflect the official position or policy of FinancialExpress.com.)

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First published on: 22-01-2023 at 10:49 IST