By Aditi Nayar

The Union Budget FY23 has been presented in the shadow of two years and three waves of the Covid pandemic. However, it has set its sights firmly on building a post-pandemic India, with a sharp step-up in capital outlay to be undertaken in conjunction with the state governments.

The biggest positive is the enhancement in the capital expenditure by Rs 1.5 trillion, two-thirds of which is by way of a loan to the states earmarked for capital spending. The Government of India’s (GoI’s) tax revenue growth assumption of 10% appears broadly realistic, with the glimmer of a small upside in GST revenues.

The disappointment is clearly a larger-than-expected fiscal deficit and borrowing figure, which caused G-sec yields to climb sharply.

For instance, the fiscal deficit is set to widen in absolute terms to Rs 16.6 trillion in the FY23 Budget estimates (BE) from Rs 15.9 trillion in the revised estimates (RE) for FY22. As a percentage of gross domestic product (GDP), the fiscal consolidation being targeted is a modest 0.5%, to 6.4% of GDP from 6.9% of GDP. A caveat is in order; the Union Budget has pegged the nominal GDP growth in FY23 at 11.1%. We believe the recent rebound in commodity prices will actually push it up to 13.5-14%, which will enlarge the fiscal consolidation to some extent.

The revised estimate of non-tax revenues from communication services for FY22 stands at Rs 719.6 billion, appreciably higher than the BE of Rs 539.9 billion, mainly because some telcos have prepaid some of their deferred liabilities. Given that moratorium was offered on spectrum and AGR (adjusted gross revenue) payments, it is likely that the BE for FY23 of Rs 528.1 billion has assumed some inflow of upfront payment towards the proposed 5G spectrum auctions.

As against the FY22 BE of Rs 1.75 trillion, the disinvestment target has been pared to Rs 0.78 trillion in the FY22 revised estimate and an even lower Rs 0.65 trillion in the FY23 BE. This suggests that the LIC (Life Insurance Corporation) inflows may possibly have been assumed to split over the two years, while the BPCL (Bharat Petroleum Corporation) transaction may be off the radar for now.

The Government of India will support the state governments through the aforementioned special assistance loan of Rs 1.0 trillion earmarked for capital spending. In addition, the Union Budget FY23 has pegged the tax devolution to the state governments at a robust Rs 8.2 trillion in the FY23 BE, 9.6% higher than the Rs 7.4 trillion included in the FY22 RE, which has been boosted by some prior-period adjustment.

The rise in central tax devolution will meaningfully aid the states as they grapple with the impending discontinuation of the goods and services tax (GST) compensation after June 2022. Additionally, the net normal borrowing ceiling of the state governments has been fixed at 3.5% of the GSDP (gross state domestic product) for FY23, along with a further 0.5% of GSDP earmarked for power sector reforms, in line with the recommendations of the 15th Finance Commission for the upcoming fiscal.

Overall, the step-up in capital expenditure targeted by the Union Budget is enthusing, reinforcing our expectation of a 9.0% real GDP growth in FY23.

The writer is Chief Economist, ICRA. Views are personal.