The Union Budget for 2023-24 may set the capital expenditure target for the next financial year at Rs 9-9.5 lakh crore, according to Radhika Rao, senior economist at DBS Bank.
This would represent an at least 20 percent rise from the budget estimate of Rs 7.5 lakh crore for 2022-23, which includes Rs 1 lakh crore as a capex-only, 50-year, interest-free loan to states.
In an e-mail interview to Moneycontrol, Rao also said the continuation of quality of fiscal consolidation over quantity could mean "a more gradual consolidation path may be viewed more favourably by the markets than a sharper correction towards the 3 percent (fiscal deficit) target".
Edited excerpts:
Is next year's budget about pushing growth to the next level or is it about somehow consolidating any gains that have been made due to the weak global environment and the fragile nature of the recovery?
We expect the upcoming budget to focus on three aspects. Firstly, continue to push supply-side catalysts which involve improving the ecosystem with the right set of enablers through higher allocations towards capex-oriented ministries as well as social, rural programs. Secondly, employment focus through more allocations towards the rural employment scheme as well as skill training and upgradation. Next, we don’t expect any major direct tax changes after rationalisation efforts in recent budgets. A tougher global environment and spillover risks are key watch factors for the authorities.
The last couple of years have seen a sizeable reduction in the fiscal deficit. Does the Centre need to continue to lower the fiscal deficit aggressively
We expect the central government to stay on track with the fiscal consolidation plans, lowering the deficit target by a feasible 50-60 basis points versus 2022-23, set at around 5.8-5.9 percent of GDP. This would mark the middle path on consolidation but at a measured pace as few of the recent tailwinds are likely to dissipate, including moderate nominal GDP growth, easing pace of private sector activity, and passage of reopening boost. Maintaining macro stability will also be crucial as global uncertainties rise in midst of recessionary risks in the West, tight liquidity, and high cost of financing.
The medium-term target for the Centre's fiscal deficit is 4.5 percent by 2025-26. But the original target is 3 percent. How important and difficult do you think is it going to be for India to reach 3 percent?
Emphasis in the past two budgets has been more on quality than quantity of consolidation, marked by an improving capex to revenue spending ratio, absorption of off-balance sheet spending items on to the books, and building in reasonable economic assumptions behind the budgetary math. If these preferences are maintained, a more gradual consolidation path might be viewed more favourably by the markets than a sharper correction towards the 3 percent target. Nonetheless, the consolidated Centre plus state deficit needs to be lowered from a fiscal sustainability perspective in the medium-term, which would ideally be accompanied by higher tax buoyancy and reduction in revenue deficits besides clarity on the FRBM Act.
What about non-tax revenue, be it disinvestment of PSUs (Public Sector Undertakings) and RBI (Reserve Bank of India) dividend?
Under non-debt receipts, next year's divestment target might be set around the more reasonable 2022-23 goal rather than earlier ambitious Rs 1 lakh crore plus levels. As it stands, the full year 2022-23 target might also be undershot, after a substantial fund raising through Initial Public Offering (IPO) buttressed collections in first half of the year.
Dividends from Central Public Sector Enterprises (CPSEs), especially in the energy sector which benefitted from high commodity prices, and banks are expected to make up for the shortfall in RBI's surplus transfer in the 2022-23 math. Collections under these sub-heads might moderate next year, leading the budget math to carry a lower reliance on non-tax revenues on aggregate.
The Chief Economic Adviser recently said the Centre can't keep spending on investments at the same pace. Do you see another 20 percent plus increase in the capex target from the revised estimate for 2022-23?
The 2023-24 capex number will be watched closely, as we recollect that the 2022-23 target also included the interest-free loan for states, amongst others. Expectations are that the number might be set at Rs 9-9.5 lakh crore, with the fine print on specific allocations also likely to be watched closely and with the likelihood that this would also involve special capex support for states.
What is the situation of private investments at the moment: is it picking up or subdued in anticipation the weak outlook for demand?
There are clear welcome signs of a pick-up in private sector activity based on improving capacity utilisation rates, banks' credit growth to large as well as smaller businesses as well as a subdued debt-equity ratio. For the manufacturing sector, the PLI (Production-Linked Incentive) mechanism has attracted significant interest from domestic and international players, on which account, pickup in long-duration investment commitments are led by certain sectors, namely electronics, engineering goods, specialty chemicals, etc. With financing costs on the rise and uncertain demand visibility, on an aggregate basis, corporates are expected to adopt a more cautious posture towards execution of funds towards medium- to long-term commitments.
Even as capex has risen, so has the Centre's subsidy bill. Could we see a fall in subsidies next year, especially for food and fertiliser?
A combination of relief measures owing to the pandemic as well as a sharp rise in commodities had led to a jump in subsidy allocations in 2022-23. Concurrently, spending towards fertilisers rose resulting in the overall second biggest subsidy outgo this year since 2020-21 when backdated arrears were added to the obligations.
A correction in global price should help lower the final fertiliser/energy tab, in turn also providing some relief to second-order impact i.e., price pressures into food costs. While the food and fertiliser subsidies are primed to lowered to at least a third or half vs. the final 2022-23 quantum, medium-term efforts like shifting to targeted direct benefit transfers and price adjustments to gradually narrow the subsidy vs. market gap will be necessary to substantially lower the sticky aspects of the revenue spending bill.
Finally, is there anything the Budget should not compromise on, irrespective of the election cycle?
Ethos of the Budget presentation is likely to be focused on pursuing inclusive development and continue to improve productivity, whilst leaning on the supply-side catalysts rather than one-off demand-driven stimulus. We expect the authorities to tap into the strategic opportunity that has been presented to the economy to assume a greater role in the world arena as well as amongst the investment community. This is not only a function of the inherent domestic momentum, but also global forces, marked by volatile geopolitics, supply chain dislocations, trade skirmishes, climate change and challenging demographics.
