Budget must snip some spends, though GST trend robust, says Barclays’ Rahul Bajoria

Allocations to capital expenditure could increase even as revenue expenditure remains a tight-rope walk.

Edited excerpts:

Historically, governments tend to enhance social scheme spending, ahead of national elections. Can the government afford to do it this time?

There are two parts to it. One is the way some of these schemes are designed, and the second is the total amount of outlay.

For instance, there is a need to think whether we should continue with the free food scheme when the economy is recovering. The government thinks about alternate provisions and this would probably find a little bit of fiscal space. We have seen a reasonable amount of progress on the revenue-expenditure side. So there's a lot of focus in efficiency gains and digitisation, which will pay over a period.

I think the strategy should be to sort of balance between capital, social and revenue requirements. We have benefited from the fact that revenues have been over and above what the nominal GDP would probably imply. I think the key challenge in the next budget could be that as nominal GDP growth comes off dramatically, how the government can manage the spending mix without really delivering any pain at the ground level. This is where the budget will be in focus in some ways.

The government has not been great in managing the expenditure side in the past as well. What can they do this time?

There are two potential drivers that can interrupt fiscal consolidation -- when revenues weaken or expenditure spikes. In the current global environment, it is difficult to see a situation where our expenditure will spike up very dramatically.

Global growth may be slowing but it is not crashing the way it did in 2020. Neither is India's economy in such a very weak shape that you would expect India's growth to suddenly slow down very dramatically. So then, it becomes a function of revenue and here I see some of the benefits of formalisation, or the higher GST collections are probably not going to be as intense as this year.

There is also one big potential shift, perhaps a couple of years down the line. The GST will need to be tweaked, either higher rate or more commodities into its fold for a wider base. Note that this is now a state government imperative, not a central government imperative. The guaranteed compensation period for states on GST is now over.

This means the states are now incentivised to actually push for simplification and for greater GST collections. So, I think that is probably a tailwind that is going to be there for the fiscal policy in India over the next couple of years.

Let’s address the capex picture. Is it robust or mixed in your opinion?

If you take the current projects which are getting completed, they were all envisaged back in 2017, 2018 and 2019 when the economy was slowing down.

The counter-cyclical fiscal spending that happened afterwards is reflected in the completion of these projects. There will always be a period where it might feel that, you know, the total number of projects being executed is coming down.

What is very interesting about the way we are going about capex is that, one, the allocations are obviously increasing over time and they are staggered. The general bias to allocate more and build up capacity to spend is going to be there. What will be interesting is the mix of spending. We have seen a lot of focus in the last three, four budgets on expressways, a lot of capex being allocated for railways, digital infrastructure, etc.

We may see a bigger spending on railways and the ongoing focus on urban development will continue. The scale of projects in bigger cities like Mumbai, Delhi, Bengaluru and Chennai is increasing and is much more ambitious. The impact it has, in terms of multipliers on growth, is quite large.

We saw quite a bit of focus on infrastructure in the previous budget and thereafter as well. Would the headline capex numbers see a big move this time, too?

The headline number was Rs 7.5 lakh crore in the last fiscal and there's a possibility that the number might get pushed to Rs 9-10 lakh crore. But Rs 10 lakh crore itself is not very large because that, as a percentage of GDP, is just about 3 percent.

At the same time, a lot of the capex spending in India happens off the budget, right?

The National Highways Authority of India (NHAI) has its own financing mechanisms. There's a lot of concessionary funding that takes place from various development agencies. So, I think, cumulatively, that number looks like to be on a reasonably steady path. I don't really see any big pullback. In monetary terms, the scale of these projects are only going to get bigger.

Speaking of the revenue side, how much of a comfort do you see for the government?

I think there is a lot of comfort as there is greater formalisation, coupled with the fact that nominal growth is relatively high. So, both factors are helping to increase the direct as well as indirect tax side and this could continue. But one has to be cognizant of the fact that nominal growth is going to come down.

So, even if you take, say a conservative assumption of 6 percent real GDP growth, 5 percent average inflation for next year gives you a nominal GDP of 11 percent, on a normal multiplier that gives you effectively about 13 percent growth in tax revenues.

It is not low but it is not great when we have seen 25-30 percent. So there is pullback but the nominal base is now very high and that will help in anchoring some of the tax revenues. As I said, the other factor is that GST tweaks are eventually required in order to improve the efficiency of the tax system.

It is something that will probably be seen as the next big driver of revenues within the system. I don't get a sense that there is going to be an increase in direct taxes, in any which way.

So, is there going to be a moderation in tax collection in FY24?

I think there will be moderation, for sure, in growth rates but in absolute terms, it will still be robust.

The average monthly GST collection in fiscal year 2022 was about Rs 1.3 lakh crore. This was roughly expected to go up to Rs 1.35 lakh crore (it was written 135. Check whether it’s 1.35 itself). But we have had a run rate of Rs 1.4-1.5 lakh crore.

Now, even if the government is conservative, and they end the year at Rs 1.5 lakh crore and expect an average run rate of about Rs 1.75 lakh crore, it is a big jump. My point is even a moderation in growth will not necessarily upset the fiscal math because the base itself has widened.

What are your expectations on fiscal deficit? Would we maintain 6.4 percent for FY22? What about the next fiscal?

There are two moving parts to the fiscal numbers -- cash balance and debt. (are these the two?). Firstly, the cash balance in government coffers. This is actually quite good. So, you know, in principle, the government can do better in terms of its fiscal deficit numbers.

But I don't see an urgency on its part to really try and surprise the market on the positive side. In the current environment, where things are so uncertain, the government would want to have some firepower. In the absence of any global shock, over the next 2-3 years, the fiscal numbers will improve.

Sure, there is a problem of relatively high debt but that can only be addressed by a reasonable growth in the system, not by significant fiscal belt-tightening. I think the government could choose to peg the fiscal deficit at 6 percent. We think that it's better to be somewhat cautious heading into next year.

One of the sore points of the fiscal policy has been the debt levels, as a percentage of GDP. Is this addressable in FY24?

I think it's addressable. But how do you do it? India's debt dynamics are sustainable, not because of our fiscal stance but because of our relatively high nominal GDP growth.

I don't think the driver of fiscal sustainability is going to change anytime soon. If you look at the way bond yields have behaved in the last year or so, we are not necessarily seeing a very dramatic shift.

Also, at the moment, with commodity prices declining, with nominal growth generally holding up, fiscal risks are benign. What is far more important is a 4.5 percent FRBM target that has been laid out for fiscal year 2026.

State finances have deteriorated after COVID-19. Is fiscal consolidation even possible?

There are, of course, a few states which have, probably, a bigger problem on the fiscal side. Now a good thing in Indian fiscal management, the way it's designed, is that there are a lot of checks and balances as far as state-level borrowing is concerned.

The RBI is empowered to manage the borrowing programme and can deal with any kind of fiscal profligacy beyond a certain threshold. That is something which adds a lot of stability to the system. What will, perhaps, be very interesting to see is how states deal with it.

So, we have seen states reducing expenditure or increasing revenues, particularly from the non-tax side. The real challenge, though, I think, will be finding tax revenues. This brings back the GST factor. There will be a greater scrutiny of how states are able to manage the GST.

So, states will show better performance ahead? What about managing expenditure?

Expenditure will matter as well. Some of the issues like the old pension scheme (OPS) coming back will add to the burden of expenditure for states on a forward-looking basis. The OPS actually improves your cash flow in the near term because governments don't have to pay pensions. Your ability to spend in the near term increases, but your longer term burden of pension increases quite dramatically.

This is something we have to watch very carefully because a lot of states which are doing it may not necessarily have the wherewithal to pay out in the future.