Finance minister Nirmala Sitharaman deserves credit for increasing the transparency of the budget numbers and improving the quality of government spending even amidst the shock delivered by the pandemic to the Centre’s finances. In the FY21 Budget, several off-balance sheet entries — mostly food subsidy expenditure — were shifted to fiscal estimates, making the Budget numbers more foolproof.
At the same time, capital expenditure increases outpaced the growth of the overall budget size in recent years. Revenue deficits have in recent years been declining as a fraction of the fiscal deficits. These trends are most likely to continue in FY24 too.
Also, the government seems to stick to the medium-term fiscal consolidation target of reducing the fiscal deficit to below 4.5% GDP by 2025-26, from the sharply elevated levels caused by the pandemic.
Reduction in food, fertiliser and fuel subsidies may create the space for a double-digit hike in the Centre’s budgetary capital expenditure to Rs 8.5-9 trillion in FY24 as well. Still, fiscal consolidation will be pursued and with the fiscal deficit pegged at 5.5-5.9% in the FY24BE, analysts feel.
For FY23, the extra tax revenues expected over the Budget estimate (BE) and savings in various schemes along with a higher nominal GDP growth would help keep the fiscal deficit within the FY23BE of 6.4% of GDP. Officials expect the Centre’s spending could be 2.5-3 trillion more than the FY23BE of 39.4 trillion. With gross tax revenues expected to be close to Rs 4 trillion more than FY23BE of Rs 27.6 trillion, the Centre’s net tax receipts could be about Rs 2.5 trillion more than the respective BE of Rs 19.34 trillion.
Against the budgeted growth of 11.1%, the advance estimate projection of 15.4% growth in nominal GDP growth would give added fiscal headroom of nearly Rs 95,000 crore or 0.3% of GDP.
“Fiscal deficit for FY23 will be managed at around 6.4% with a downward bias,” Bank of Baroda chief economist Madan Sabnavis said. “For FY24, we may expect the Budget to be placed at around Rs 1-2 trillion higher than the revised numbers of FY23,” Sabnavis said, adding fiscal deficit may be targeted at 5.5-6% for the next financial year.
Against the backdrop of a global growth slowdown and geopolitical uncertainty, rating agency Icra anticipates that the FY24 Union Budget will focus on supporting domestic economic growth, with a continued impetus towards infrastructure. “We expect lower subsidies to create the space for a double-digit hike in capex to Rs 8.5-9 trillion and still allow for moderate fiscal consolidation, with the fiscal deficit seen at 5.8% of GDP in the FY24BE,” Icra chief economist Aditi Nayar said.
Goldman Sachs said in a report that the central government will likely consolidate its fiscal deficit to 5.9% of GDP in FY24, fully driven by a reduction in food and fertiliser subsidies, and projected tax revenues to remain buoyant in the year.
According to an FE analysis, the Centre’s subsidies on food, fertiliser and fuel are likely to be about Rs 3.6 trillion in FY24 or 34% lower than Rs 5.5 trillion estimated for FY23, aided by the discontinuation of the free grains scheme and cooling of global commodity prices.
The Centre will likely spend about Rs 2.32 trillion more in major subsidies than Rs 3.18 trillion budgeted for FY23, including about Rs 0.8 trillion in the free grains scheme, Rs 1.3 trillion in fertiliser and Rs 22,000 crore on cooking gas. The FY23 budget estimate was Rs 2.06 trillion for food subsidy, Rs 1.05 trillion for fertiliser and Rs 5,812 crore for petroleum. For FY24, the Centre may budget about Rs 2 trillion for food subsidies with free grains to National Food Security Act (NFSA) beneficiaries at no cost for the first nine months of the year. Fertiliser subsidies may return to a rather normalized level of Rs 1.5 trillion due to the likely further cooling of commodity prices due to the global economic slowdown.
As the domestic investment cycle picks up, and the current account deficit remains wide, higher government borrowing can increase bond yields and increase funding costs for corporate, Goldman Sachs said. “To fund the central government’s fiscal deficit of nearly Rs 18 trillion in FY24, we estimate net borrowing of around Rs 13 trillion, after accounting for non-market financing from small savings, state provident funds etc,” it said.
According to Bank of Baroda’s Sabnavis, there will be repayments of around Rs 4.5 trillion in FY24, which will push up the gross borrowing programme to around Rs 16.5-17 trillion with a net being around Rs 12.25 trillion. Analysts have estimated net borrowings to be around Rs 11.8 trillion in FY23 as against BE of Rs 11.18 trillion.
Overall, revenues are expected to be robust for FY24. Based on a nominal GDP growth forecast of 11% on year, Goldman Sachs has projected income tax and corporate tax revenues to grow by 12% each. “Under indirect taxes, GST is growing at a healthy pace, and we expect 14% yoy growth in FY24,” it said.
“Assuming that windfall taxes on the export of petrol/ diesel and on domestic crude production are not continued into FY24 on the back of a decline in crude oil prices, we expect excise duty collections to fall to 1.0% of GDP (from an estimated 1.1% of GDP in FY23), taking the overall receipts down by 10bp.”
The government is unlikely to set a target to complete any new disinvestment transaction, including the sale of any public sector bank, next fiscal as it will focus on concluding a few deals where the process has already begun. The disinvestment receipts target for FY24 would, therefore, not be very ambitious and may be fixed at Rs 50,000-60,000 crore.
Given that transactions are time-consuming in many deals due to issues such as delays in getting approvals and demerger of non-core assets, the disinvestment target of Rs 65,000 crore for FY23 would likely be missed by a significant margin.