Budget 2023: Centre may fix FY24 fiscal deficit target at 5.9% of GDP, borrow Rs 15.5 lakh crore

Finance Minister Nirmala Sitharaman will present Budget 2023 on February 1.

Finance Minister Nirmala Sitharaman is expected to set a fiscal deficit target of 5.9 percent of gross domestic product (GDP) in the budget for 2023-24 she will unveil on February 1.

According to a Moneycontrol poll of 17 economists, the Centre will next year continue to move towards its medium-term deficit target of 4.5 percent by 2025-26 in a gradual manner even as it ensures support for growth remains.

"On one hand, growth momentum will need to get continued support from fiscal levers, particularly with a severe global recession looming on the horizon, but at the same time there would be expectations for the government to aim for a modest fiscal consolidation, so as to not crowd out private investments and to be able to bring down the Centre's fiscal deficit target to 4.5 percent of GDP by 2025-26, as per the proposed glide path," said Kaushik Das, Deutsche Bank's chief economist for India and South Asia.

India is expected to clock a growth rate of 7 percent in 2022-23, but economists are predicting a sharp downtrend in 2023-24, with some forecasting a fall in GDP growth to as low as 5.1 percent – 140 basis points below the Reserve Bank of India's (RBI) number of 6.5 percent.

One basis point is one-hundredth of a percentage point.

Expenditure reshuffle?

After a year in which the Indian economy battled high inflation, the 2023-24 Budget will have to utilise any fiscal room available to push growth.

The Centre has seemingly created some fiscal space by ending its free foodgrain scheme, the Pradhan Mantri Grib Kalyan Anna Yojana, and instead providing the same benefits under the National Food Security Act for the entirety of 2023.

"The fiscal impact of this reorientation of the food subsidy program will be net positive compared to the 2022-23 math," said Radhika Rao, senior economist at DBS Bank.

The Centre has racked up a food subsidy bill of Rs 1.48 lakh crore in the first eight months of 2022-23. Economists see this rising to around Rs 3 lakh crore for the full year.

According to Nomura's estimates, the Centre may spend Rs 3.9 lakh crore in total next year on its three major subsidies – food, fertiliser, and petroleum – compared to an expected Rs 5.3 lakh crore this year.

A reduction in the subsidy bill should help the Centre keep pushing the pedal on capital expenditure.

"We expect the central government to continue to phase out pandemic-era exceptional expenditure, while switching the focus of its spending where it is needed the most – on public capex, incentives to support consumption and exports, along with social infrastructure of health and education," said economists from QuantEco Research.

The median of estimates of 12 economists pegged the 2023-24 capex number at Rs 8.88 lakh crore, up from Rs 7.5 lakh crore this year.

Income statement

Unlike its expenses, the government may not receive a significant boost from one of its numerous income sub-heads.

In 2022-23, the tax mop-up is set to easily exceed budget estimates by more than Rs 2 lakh crore, with Goods and Services Tax collections above the Rs 1.4-lakh-crore mark in every month of the financial year so far.

"Still, the gains from formalisation and more efficient processes have limits, and in 2023-24 we expect buoyancy to start to moderate and return closer to the historical average," said Rahul Bajoria, chief India economist for Barclays.

"This, combined with slower growth in nominal GDP, suggests to us an environment where revenue growth will be strong but closer to historical levels, rather than significantly outperforming."

Growth in tax collections track the increase in nominal GDP, which surged 19.5 percent in 2021-22 and is estimated to rise by 15.4 percent this year.

However, with inflation moderating and growth set to weaken, economists see the Union Budget assuming a nominal GDP growth of 10.5 percent for next year to estimate key numbers.

According to Aditi Nayar, chief economist at ICRA, gross tax revenue may be estimated to rise 9.4 percent next year to around Rs 34 lakh crore, with growth in direct tax collection likely outpacing indirect tax collections.

"The latter is expected to be constrained by customs duty collections and reversion of excise duty on auto fuels to pre-Covid levels," Nayar said.

Within non-tax revenue, the disinvestment target could be lowered to Rs 50,000 crore, with only 48 percent of the current year's target of Rs 65,000 crore achieved so far.

Financing the deficit

With the Union government's expenditure in 2023-24 expected to exceed its revenue by nearly Rs 18 lakh crore and bonds worth Rs 4.4 lakh crore maturing next year, it may peg its gross market borrowing at Rs 15.5 lakh crore, up from Rs 14.21 lakh crore this year.

On a net basis, the market borrowing is seen at Rs 11.7 lakh crore.

"The government needs to somehow find a solution to check the upward momentum in the government borrowings as otherwise the current high public debt to GDP ratio and the consequent rising interest rate burden would limit the flexing power of the government towards chanelising expenditures in the best directions," said YES Bank economists.