Driving capex and growth with fiscal prudence riding pillion: Nirmal Jain

A recent study by

analysed expenditure trends in the last four pre-election-year (PEY) budgets. They concluded that governments do not always step-up revenue expenditure relative to capital expenditure. In 3 out of 4 PEY budgets, growth expenditure was accelerated much more than populist schemes. This point has been again reiterated in the budget.

Coming back to this year’s budget, sharp increase in capex (up 33% in FY24) is the much-needed stimulus for a slowing economy. Roads (raised by 25%) and Railways (up 50%) accounted for the bulk of this increase. Notably, the Economic Survey had highlighted the relatively rapid progress in the roads sector as compared to railways. Seems like this higher allocation aims at addressing this imbalance. Aggregate expenditure has increased by just 8.7%, owing to a minor uptick of 1.2% in revenue expenditure.

The measured increase in expenditure highlights the government’s commitment towards the fiscal deficit target of 4.5% by FY26. This is likely to be gradual with a fiscal deficit of 6.4% in FY23 and 5.9% in FY24.

As expected, subsidies for food and fertilizers were cut by 27% from ₹5.1 trillion in FY23 to ₹3.7 trillion in FY24, thanks to favorable movement of international prices and pruning of subsidized grains schemes from 100MTpa to 50MTpa w.e.f. 1 January 2023. This by itself would have brought down fiscal deficit by roughly 40bps, affording the FM some freedom in the rest of the budget.

The trimmed increase in aggregate expenditure finds reflection in important rural schemes – MNREGA which has been cut by 32% to ₹600 billion, though like last year, the government may breach this number. Allocation towards PM AWAS, the affordable housing scheme, has also been increased by 3% over FY23 actuals to ₹796 billion. For aggregate rural centrally sponsored schemes, the revenue expenditure outlay is cut 13% to ₹1.57 trillion. There is a ₹90 billion help in the ECLGS scheme for MSMEs. For lower income individuals, there is an effective tax reduction (at the ₹9 lakh salary mark, the effective tax rate comes down from 6.7% to 5%). Overall, this budget does not do much for rural/low income group sections.

Let us now understand the math behind the receipts. We believe the budgeted growth in gross tax is in line with nominal GDP growth at 10.5%. The growth rate appears reasonable given the real GDP growth of 6% and average inflation of 4.5-5% in FY24. Collections from both Direct and Indirect taxes are budgeted to grow by 10.5% in FY24. Within this, Corporate Tax & Income Tax could grow 10.5%, GST by 12%, Customs by 11% and Excise by 6%. Growth in non-tax revenue is budgeted at 15% while divestment receipts are budgeted same as FY23RE at ₹600 billion. The divestment pipeline is healthy with ongoing discussions on stake sale in , , Shipping Corp, , , Pawan Hans, etc. However, achieving the target of ₹600 billion in FY23 seems difficult as only ₹311 billion has been achieved yet. Considering all the above, growth in overall receipts at 11.7% is in line with GDP growth assumptions.

The budget provisions have some negative impact on REIT and insurance products with embedded investment. The resolve to stick to fiscal consolidation path though should keep interest rates benign and that should support demand for housing and cement sectors.

The budget will bolster the domestic growth stories, without stoking inflation due to fiscal conservatism and emphasis on capex.