India may have to cut capex in FY24 as revenue assumptions may be inflated: Fitch Ratings

India has some room to cut capital expenditure in FY24 as there may be pressure on revenue as the buoyancy assumptions in the Union budget may be inflated, Fitch Ratings said.

“The government's large ramp up in capex plans in FY24, does give a bit of room for them to manage/cut spending on the capex side, if there are pressures elsewhere in the budget. The revenue buoyancy assumption in the budget may be on the high side when compared to the historical performance, which could lead to pressure on revenues,” Jeremy Zook, Director, Asia Sovereign Ratings at Fitch, told Moneycontrol in an interview.

Finance minister Nirmala Sitharaman has announced a 33 percent increase in capital expenditure for FY24, with a record Rs 10 trillion for infrastructure development, which is 3.3 percent of GDP.

“The government's capex plans are positive for the economic outlook. India still has a lot of infrastructure needs and the government can help with this significant increase in capex. But in FY24, if growth comes below our current 6.2 percent forecast, it could begin to add to some pressures on the revenue side. So, certainly, there are a lot of risks,” he said.

The government can manage these capex plans without adding too much pressure to the ability of the private sector to access credit in the current environment, where banks seem to be able to ramp up credit, he said.

Downside risks

“But there are risks tilted to the downside. The ongoing Ukraine-Russia conflict could impact commodity prices. The budget envisions a fair bit of cutting in terms of spending on subsidies. If commodity prices were to spike further, It may become challenging and would lead to upward pressure on the spending side,” said Zook.

India has estimated a 31 percent decline in food subsidies at Rs 1.97 lakh crore, a 22 percent drop in fertiliser subsidy at Rs 1.75 lakh crore and a 75 percent fall in the fuel subsidy at Rs 2,257 crore for FY24.

Revenue could be a challenge in FY 24, though a relatively high level of nominal GDP growth should be a supportive factor. But the high level of revenue growth seen over the past year will moderate quite a bit. “There are risks to our growth forecast of 6.2% that would put some downside pressure on revenues,” he said.

Compared to other BBB economies, India's revenue to GDP ratio and spending are a bit on the lower side, which is a constraint to fiscal flexibility when it comes to the ability of the government to meet its expenditure needs.

“Efforts to push up the revenue ratio are quite important in deficit reduction towards a more sustainable fiscal position. The fiscal deficit target of 5.9 percent for FY 24 is achievable but challenging,” Zook said.

The growth forecast of 6.2 percent for FY24 is based on an expected slowdown in domestic consumption, as high interest rates and inflation will eat into households’ real incomes, he added.

“A large portion of the slowdown in growth is coming from the domestic consumption side. In the past couple of years, domestic consumption has been quite robust because of pent-up demand during the pandemic. Maintaining that high level of consumption would be quite difficult in the coming year. Inflation — which is still relatively high — and high interest rates are going to eat into households’ real incomes and lead to pressure on the consumption side,” said Zook.

Debt ratio outlook

As far as the debt ratio is concerned, Fitch Ratings estimates it to stabilise at 82 percent of GDP over the next five years but does not forecast an improvement. Over the past couple of years, debt peaked at over 87 percent of GDP and has come down in the past two years, mostly because of very high nominal GDP growth.

“As per our latest forecast, the debt ratio is seen stabilising at around 82 percent of the GDP level over the next five years. We expect nominal GDP growth to remain relatively high at about 10.5 percent over the next five years,” said Zook. “But the fiscal deficit is going to remain relatively high compared to India's peer countries, which offsets the positive dynamic from nominal GDP growth. It does lead to a stabilisation in the debt ratio, but not a downward trend or improvement thereof.”