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FY23 BUDGET PREVIEW :

Balancing growth and stability

The imminent FY23 budget must balance the twin objectives of growth and stability: uneven recovery demands continued policy support, whereas a wider trade deficit and likely Fed tightening warrant fiscal prudence. We expect a modest consolidation of 30bp to 6.5% of GDP versus the 240bp fiscal compression in FY22. Taxes could slip to 10–12% from 25%-plusin FY22 amid lower WPI/NGDP, fuel tax cut and a high base, leaving spending contingent on disinvestment receipts.

Policy focus could favour rural spending (weak sentiment, elections) but infra spend would call for extra-budgetary resources (DFI, asset monetisation). For manufacturing, PLI expansion and more sops for MSMEs are likely. Room for large tax cuts though is rather limited.

FY23 fiscal imperative: Balance growth with stability

The Budget 2022–23 will have to be a balancing act—supporting recovery while maintaining fiscal prudence. Domestic recovery has been uneven/split so far (nominal versus real, exports versus domestic demand and large businesses versus MSMEs) and needs policy support. But the external backdrop has turned more prohibitive with the Fed on a tightening path at a time when India’s trade deficit is no more benign. Besides, India is preparing for inclusion in the global bond indices soon. This warrants fiscal prudence. Hence, expect a modest consolidation in FY23.

Unpacking the fiscal math: Slower revenues, modest consolidation

The FY22 fiscal deficit target of 6.8% of GDP is quite achievable despite the shortfall on disinvestment receipts. Tax revenues saved the day (15–20% higher than budgeted)—aided by a sharp bounce in WPI and NGDP growth. Spending is running stronger than budgeted, with the tilt clearly towards capex (rural spend weak). Expect FY23 to be a more normalised year. Tax revenues are set to moderate to 10–12% YoY amid slower WPI and NGDP (link), fuel tax cut and high base. And given further ~30bp tightening of fiscal deficit to 6.5% in FY23, the space for spending is contingent on large disinvestment receipts (~INR2tn) and extra-budgetary resources. Expect spending to grow 8–10% with a tilt towards rural spending.

Broader policy focus, and market outlook

From the broader policy standpoint, the highlights could be: i) spending rotating towards the rural sector (weak in FY22) while infra-spend would depend on expediting DFI and asset monetisation process; ii) expanding the scope of PLI scheme, extension of 2019 tax cuts for new manufacturing units (with the pandemic delaying plans), further rationalisation of import duties and more sops for MSMEs; and iii) while the FM may refrain from large tax cuts, any plan to launch MNREGAlike counter-cyclical job scheme for the urban economy would be welcome.

From markets’ standpoint, the budget may not be a big mover given the more challenging backdrop. Earnings, financial conditions, etc would be the bigger medium-term drivers. Increased rural allocation should support our call of lower-end consumption revival and our defensive bias in the portfolio (link).

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