India FY 2024 Budget Preview: Walking a Tight-rope

Figure 1: India’s Fiscal Balance and Deficit 

Source: Continuum Economics

Fiscal Consolidation Gains Unlikely 

The expected loss of growth momentum, in the wake of the Russia-Ukraine war and monetary tightening, alongside risks a protracted and deep global recession, is likely to be at the forefront of the 2023 budget presentation. The FY 2024 Union Budget is set to be tabled in parliament on Feb. 1, and we expect higher allocations for capital spending and an overall expansionary budget with a focus on areas of large vote base. This will likely include rural economy, infrastructure creation, job creation push through increased outlay for Production Linked Schemes for industry, and affordable house. Additionally, support measures such as subsidized credit to small and medium-sized enterprises (SMEs) and contact-intensive sectors, and subsidy provisioning for the farming community, and front-loading state transfers to push them to prioritize capital spending as well. Welfare programs such as the Free Food Grain scheme, MNREGA (the rural employment guarantee scheme) and other subsidies will need to be funded, indicating that significant gains on the fiscal consolidation front will be unlikely. 

The government pegged its FY 2023 growth forecast at 7%, in line with both the Reserve Bank of India’s and our expectations. The government budgeted a fiscal deficit of 6.4% of GDP for the center for FY 2023, but we expect the government miss the target by a small margin, and succeed in reducing the fiscal deficit to 6.5%. Borrowing needs will also remain elevated. We expect the FY 2024 fiscal deficit target to be set at 5.9% of GDP. 

Robust Revenue Collection

Revenue collection has been buoyant on the back of strong economic activity, which drove high levels of Goods& Services Tax (GST) collection over the second and third quarter of FY23. Additionally, ease of tax filing, reduced compliance burden, and digitization have also supported income tax collection this year. Net direct tax collections for FY 2023 have grown at a robust pace of 24.5% y/y; corporate rate growth was recorded at 19.7% y/y and personal income tax growth touched 21.6% y/y in the first three quarters of the year. While GST collections have been north of INR 1.4tn since the start of FY23. However, the government will need to find additional sources of broadening its tax base to balance its expenses. There is a likelihood of revision to the tax slabs under GST and changes to customs duties. Meanwhile, the government remains short of meeting its disinvestment target, as asset sales have stalled for various reason over the past two quarters. Wary investor sentiment in the aftermath of the Russia-Ukraine war and its impact on emerging markets, and vague government policies around disinvestment, saw sale of stake in state-owned enterprises such as the Bharat Petroleum Corporation Limited, CONCOR and IDBI Bank shelved. Therefore, while revenue collection remains buoyant, the government will have to fast track its disinvestment process and asset monetization procedure to ensure steady improvement in revenue collection into FY24. 

Rebuilding rural economy 

It is important to note that majority of India’s pent up demand release was from the urban consumer. The rural economy is still in its fragile recovery state, as it continues to be agriculture sector dominated. Sales of two-wheelers and tractors are yet to recover to the pre-pandemic levels, and indicate that rural demand remains weak despite India registering a robust real GDP growth of 7% y/y in FY23. Therefore, the overarching theme of the FY 2024 budget is likely to be the thrust on aiding rural demand, and supporting consumption. We expect measures to augment disposable income of the weaker sections of the society, who have either yet to recover from the fallout of the pandemic or are reeling under the impact of the commodity price rally in the aftermath of the Ukraine conflict.

The government had introduced a Free Food Grain scheme in 2020 to support the rural economy by providing grains to the weaker sections at no cost. The scheme was scheduled to end in December 2022. However, we expect a continuation of the scheme atleast until 2024. Additionally, we expect an increased outlay for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), which provides a legal guarantee of 100 days of employment in every financial year to adult members of any rural household willing to do public work-related unskilled manual work at the statutory minimum wage. 

Government investment to boost private cycle 

Public investment in infrastructure projects is likely to remain the key focus of the FY 2024 budget given a higher multiplier and the need to sustain growth. Reports suggest that the Bhartiya Janta Party-led government will set aside a high capital expenditure outlay, in line with its earlier focus on building social and physical infrastructure in the country. This is expected to help initiate a private investment cycle, which has been deferred so far given evolving domestic and global environment and cautious business sentiment. Government push should help to crowd in private investments, especially in infrastructure. Investment in large infrastructure projects covering roads and highways, railways, power, housing, urban transportation and special economic zones will boost short-term economic growth by creating employment as well as build the momentum for medium- to long-term growth by boosting production efficiency and cost effectiveness.