The delicate act of maximizing fiscal impulse

The FY24 Union Budget will be presented against the backdrop of renewed uncertainties around global and domestic growth and, of course, the Union elections in May 2024. However, even as additional support for some vulnerable segments of the economy is warranted, the policy focus is expected to remain on investing and proving growth potential in the medium term, including boosting investment dynamics while maintaining fiscal discipline. Policies should focus on credible and clearly communicated consolidation be anchored on stronger revenue mobilization, and increase spending efficiency. The Center has laid out a glide path to reduce GFD/GDP to 4.5% in three years, and against this backdrop, we expect 0.5%- 0.6% GDP consolidation in FY24, putting the Center’s fiscal deficit at around 5.8% of GDP. Hard fiscal-balancing choices: patchy growth momentum and consolidation To be fair, economic recovery has proven resilient to supply-chain bottlenecks and sticky inflation. However, the year ahead will likely be patchy as we struggle to find the next lever of secular growth amid missing economic agents. The fiscal space exists against a backdrop of persistently high government debt and deficit levels, implying an even reduced ability to accelerate expenditures. On a broad level, policy challenges ahead of the budget remain somewhat similar to last year, amid the still-patchy K-shaped growth and consumption, recovery post-pandemic, and the divided labor market, which has continued to play out even as the K-shaped spread has narrowed, especially on the income shock for the bottom vs. the top. However, there is a fear that growth and demand levers could lose their vigor in the medium term once pent-up pressures are exhausted. , , Managing the twin deficit While fiscal imbalances understandably worsened during the pandemic, the glut of excess private sector savings and retreat into private investment implied that the private sector could absorb large deficits without the need for foreign capital. The current account, which essentially is the economy’s investment-savings gap, actually went into surplus. Hence, it becomes imperative that the Union Budget maximize the fiscal impulse by focusing expenditures on both demand management and domestic production. This would ensure that potential growth picks up in the medium term. As a result, as the country emerges from the crisis, the budget will be scrutinized for: i. the pace of fiscal consolidation; ii. how policymakers prioritize spending ahead on capex and non-capex; iii. how they plan to fund it; iv. how they deliver on their strategy to return to a more sustainable medium-term debt path; and v. how they intend to increase growth potential in the coming years. The fiscal balancing act requires policymakers to continue to struggle with the delicate act of maximizing the fiscal impulse while also aiming for consolidation, reflecting the hard choice of uneven growth momentum and debt sustainability ahead. On a broad level, policy challenges have somewhat evolved from last year, and this year is a pre-election year and may have some populist bias. All eyes will now be on how the government manages the fine balance of propelling economic growth and fiscal management in FY24. Markets are understandably obsessed with the headline tax as a proxy for fiscal policy. The policy perception of the cost of the trade-off between growth and possible market stability amid tighter global financial conditions will decide whether the fiscal stance will be pro-cyclical or counter-cyclical in nature. , 1. Priority is given to the rural sector, PLIs, and the MSME sector. The focus will be on rural areas, primarily through improved income support. The government’s investment in agriculture and rural development has stabilized at 1.0% of GDP, down from 1.5% in FY21 (Ex 14). , So far, the government has spent 50% or 70% of BE on agri-rural revex, and we think there could be a higher-than-budgeted spend in FY23 and an increased allocation in FY24BE ahead of the 2024 general elections. Apart from a weaker ToT, there has been a sub-optimal sectoral rotation of rural employment from high-productivity sectors to low-productivity ones, even with a mere gain of 2.8 million jobs since COVID. Agri-employment (low,, paying, low productive) has risen dramatically at the expense of rural services (high income,, high potential). Thus, formalization has taken a step back in the rural sector. , 2. Continued need for infrared, push, The need for a large infrastructural push could continue as the private capex cycle lags as a lever for sustained growth. The aim, ideally, would be to rationalize non-capex expenditure and taper subsidies even as it prioritizes the capex spend while consolidating the fiscal. The emphasis on aggressive asset sales (existing public infrastructure, monetization, disinvestment, and strategic sales, among others) will continue in the upcoming budget, particularly as the government falls short of its FY23 divestment target. 3. Taxation: tinkering expected on personal income, tax, and capital gain taxes, On the tax front, personal and income taxes may be tweaked at the margin. , , The Union Budget may see income tax rates lowered under the concessional tax regime, which was introduced in 2020. So far, individuals have largely chosen to stick with the old tax regime with exemptions, despite the new regime offering lower rates. There are also discussions about,, such as house rent, insurance, and long-term investments (such as NPS, ELSS, and PF), as well as exemptions in,, the new scheme to encourage people to move there. The basic exemption limit could also be increased from Rs 2.5 lakhs to Rs 5 lakhs per year. , FY24 Fiscal Math: Consolidation-led GFD/GDP at 5.9%, we model FY24E GFD/GDP at 5.9% (Rs17.5trn), following 6.4% (Rs17.4trn) in FY23E, with gross tax revenue growth assumed at lower-than-nominal GDP growth, at 6-7%. This comes after a robust 14% in FY23E. Non-tax revenue is at Rs. 2.9 trillion, and divestment proceeds are at Rs. We assume 5% overall expenditure growth with a largely similar proportion of revex to capex (including interest payments) – 3% revenue expenditure growth and 15% capital expenditure growth. We assume nominal GDP growth of 10.5%. , Tax relief is on the way: We estimate gross tax revenue growth at 6.2% (after a robust expected growth rate of 14% in FY23E). Tax buoyancy is likely to mean a return to pre-Covid levels, with the Center’s tax/GDP ratio healthy at 10.9%, higher than the average seen in a few pre-pandemic years, even though it may be lower than FY23E (11.3%). We anticipate a 8%-10% increase in corporate taxes year over year (3% of GDP), which will be aided by an earnings growth estimate of 18.7% for the Nifty 50 based on consensus estimates for the coming year. This is in contrast with our estimated growth of 20% in corporate taxes in FY23E. , Amid some tinkering with personal income taxes, we see them grow by 5–6%. GST is likely to grow by 10% (18% in FY23E), seeing the GST/GDP ratio higher at 3.0%, in line with the 3% seen since FY19. Higher non-tax revenue, led by increased RBI dividends: We see non-tax revenue at Rs2.98 trillion (Rs2.57 trillion, FY23E), led by higher RBI and surplus, while telecom-led revenue normalizes. The RBI’s surplus transfer of Rs1 trillion would most likely be driven by profits from massive FX sales, higher interest income earned abroad, and a return of the RBI to repo mode. RBI dividends were Rs400 billion lower than BE in FY23, but this could be offset in part by higher PSU dividends. , Madhavi Arora is the lead economist at Emkay Global’s institutional equities desk. She has over 13 years of rich experience as a macroeconomist. Harshal Patel is a research associate in economics at Emkay, Global.

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