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Below Note on Union Budget Expectations 2023-2024 by Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC

Government will most likely meet its fiscal deficit aim of 6.4% of GDP in FY23 aided by robust tax revenue growth and higher than budgeted growth in nominal GDP. The CSO, in its first advance estimates, has pegged the nominal GDP at Rs. 273 trillion as against budget estimate of Rs. 258 trillion. The higher denominator alone will reduce the fiscal deficit by 0.36% of GDP. Additionally, the government is likely to collect over Rs. 3 trillion of excess taxes over and above the budget estimates. This should offset the excess spending on food and fertilizer subsides and shortfall in disinvestment proceeds in the current financial year.

Slowing global growth, sluggish domestic economic recovery and political considerations ahead of 2024 Union election might influence budget math in FY24. However, we expect the government to remain on fiscal consolidation path and further reduce the fiscal deficit target to around 5.8% of GDP in FY24. They might keep some room to increase spending if economic growth deteriorates.

From bond market’s perspective, main focus will be on the quantum and maturity profile of the government’s market borrowings. At 5.8% fiscal deficit, net and gross market borrowing would be around Rs. 12 trillion and Rs. 16.4 trillion respectively.   

Increased demand from Insurance and pension funds might continue to support the ultra-long segment (10 year plus maturities) of the bond market. However, tightening liquidity condition and elevated credit growth might reduce the banks’ demand for bonds next year.

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