Budget 2023 | Market won’t be able to digest fiscal deficit target above 6%, says Morgan Stanley chief economist

As all eyes are on Budget 2023, the last full Budget of the Modi government ahead of the 2024 general elections, Morgan Stanley expects the fiscal deficit to be 5.9 percent of the GDP in FY24 against 6.4 percent estimated for FY23.

Anything above 6 percent would be difficult for the market to digest, said Upasana Chachra, Chief India Economist, Morgan Stanley, to Moneycontrol.

“There is a need to consolidate the fiscal deficit. The starting point of 6.4 percent is already so elevated that markets will not like it if there is any further slippage. Our estimation of 5.9 percent is a gradual consolidation path. 6 percent or anything above 6 will be a tad negative for markets,” she said.

The fiscal deficit is the shortfall in a government's income compared with its spending. It is calculated as a percentage of the gross domestic product (GDP).

Also Read: Budget 2023: The worst for rural economy is definitely behind us, says Morgan Stanley Chief Economist

According to Chachra, consolidation will be led by a reduction in subsidy-related expenditure, which will ensure the government continues with its focus on capital spending amid expectations of a steady trend in tax revenues.

“Rationalisation in subsidies will mainly be in the food and fertiliser segments. Both had ballooned over the past few years. But, the free food programme has been stopped now and this will give room for savings,” she said.

Morgan Stanley’s view is that the capex spending will increase to 2.9 percent of GDP in FY24 from 2.8 percent in FY23. The focus will be on improving the ease of living, job creation, access to infrastructure and availability of amenities, the firm said in a recent report.

With disinvestment till date touching only 43.7 percent of the FY23 target of Rs 65,000 crore, the firm expects disinvestment revenue to remain weak at Rs 35,000 crore in FY24.