Budget 2023: There is not much room for experimentation

The FY23-24 budget follows a turbulent year for India’s fiscal dynamics, where a surge in subsidies due to the Russia-Ukraine conflict was offset by materially higher tax collections, leading to a general sense of improvement in fiscal backdrop. The government has also slowly but steadily been withdrawing pandemic-related emergency measures, which should add to fiscal sustainability over the medium term.

We believe Finance Minister Nirmala Sitharaman can continue to prioritise capital expenditure, as revenue expenditure looks set to be broadly steady, allowing for some further fiscal consolidation in FY23-24. We forecast India’s consolidated fiscal deficit will reach 9.9% of GDP (central government: 6.4%; states: 3.5%) during FY 22-23, broadly on track to meet the Fiscal Responsibility and Budget Management (FRBM) Act targets.

For FY23-24, we forecast the consolidated deficit will be 9.3% of GDP. For the central government, we expect a fiscal deficit of ₹17.7 trillion to be proposed (5.8% of GDP), which would allow the government to raise spending to around ₹46 trillion.

The stoppage of the pandemic food distribution scheme, coupled with the moderation in global commodity prices, should help in creating some fiscal space, but in a pre-election year, we do not expect any material push to increase the pace of fiscal consolidation, and any extra fiscal room is likely to be spent in order to ensure economic growth remains robust.

While rapid growth in tax revenue has helped India run an activist fiscal policy that acted as a shock absorber for last three years, as nominal GDP is expected to slow down in FY23-24, the need for continued consolidation is critical for debt sustainability.

This means that fiscal policy, while expansionary in the near term, will need to turn slightly more restrictive in the medium term – which could either push up inflation (through GST or fuel-duty hikes), or push down growth (through expenditure rationalisation) – which should help to ensure macro stability in the medium term.

Rahul Bajoria is MD & Head of EM Asia (ex-China) Economics, Barclays