By DK Joshi
The fourth and final full Budget of the incumbent National Democratic Alliance (NDA) government before the general election next year chose fiscal rectitude over pre-election largesse. It was framed against the challenging backdrop of a looming global recession and continuing geopolitical uncertainty.
While the task before the Budget was cut out — to protect the economy from domestic and global headwinds in what looks like a year of many unknowns — there does not appear to be much fiscal room to do that. So, this Budget has resisted the temptation to fire demand by spending more in a pre-poll year.
That said, fiscal authorities will need to keep their options open, in the event the global economy throws a few curveballs. Moreover, supporting growth through fiscal policy in times of high inflation is always tricky. Notwithstanding huge deviations from the Budget estimates in both expenditure and revenue, the fiscal deficit for FY23, at 6.4% of GDP, was on target due to upside on tax collections.
This was important for three reasons. One, India has the highest debt to GDP ratio among similarly rated sovereigns, which makes it vulnerable on that count. Two, the Covid pandemic had pushed the fiscal deficit beyond comfort levels and it needed to be returned to the envisaged glide path.
A focus on fiscal consolidation during a pre-election year also enhances policy credibility of the government among market participants. Three, this move works to complement the policy action taken by the RBI to restrain inflation, particularly the sticky core, which is sensitive to demand conditions.
The Budget assumes nominal GDP to grow 10.5% in fiscal 2024, slower than 15.4% this fiscal. This is realistic as both real GDP growth and inflation will print lower . A lower nominal growth would imply lower tax collections. But even within the revenue-constrained scenario, the Budget has accelerated the momentum on public capital expenditure allocation by cutting revenue expenditure.
Last year, too, a similar strategy was followed. But the budgetary assumptions were belied by the Russia-Ukraine war, leading to spikes in commodity and crude prices and bloating the domestic subsidy bill.
Government borrowings have been budgeted to go up in nominal terms but at Rs 15.4 trillion they remain below market expectations. Overall, the markets have received well the signal on the commitment to fiscal consolidation, which will have a salutary effect on government bond yields. This, together with lower inflation as the RBI’s rate hikes peak out and the lower crude prices, will see 10-year government bond yields cool to 7% from the current levels of 7.4%. It will also help in lowering the current account deficit, which we expect to fall to 2.4% in fiscal 2024.
The writer is a chief economist at Crisil