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We see the FY23E Union Budget being “fiscally prudent” as well as “growth supportive”. We expect the government to continue its growth agenda via higher capex allocation, which will accelerate the investment cycle and employment. We also expect fiscal conservatism approach to be back gradually keeping in mind the likely inclusion of India in the global bond indices. With buoyancy in tax revenues, relatively contained spending and higher nominal GDP growth, we expect fiscal deficit to be contained at 6.3% vs. BE of 6.8% of GDP for FY22E. With a goal to reach a $5-trillion economy by FY25E, we expect capital expenditure allocation to continue to remain higher for FY23E as well while healthy tax revenues and mega disinvestment pipeline may help contain fiscal deficit to ~5.0%.

Key expectations from upcoming Budget:

• GDP growth, tax collections to remain buoyant; higher disinvestment to provide further fillip: Nominal GDP is expected to grow at historic high rates of ~17.6% in FY22IE to reach $3 trillion. We expect growth to continue to remain stronger in FY23E as well with likely nominal GDP growth of 14.5%. Pent-up demand, fully opening up of economy and acceleration in the private as well as public capex will be key triggers. Given this, we expect FY23E tax revenue growth to remain healthy at 14.1%. Further, raising capital via higher disinvestments and bringing forward the process of monetisation pipeline will remain a key focus area for FY23E

• Higher outlay on capex to continue - We expect capital expenditure outlay to increase 26.8% to | 7.0 lakh crore for FY23E. This along with other financial funding options could increase the government’s financing capability to support NIP. Key areas of allocation would be road, defence, railways, water, urban infrastructure, etc. Within infrastructure segment, we expect higher allocation towards roads (29% YoY to | 1.4 lakh crore), railways (22% YoY to | 1.3 lakh crore), water segment (Jal Jeevan mission 20% YoY with river interlinking segment also getting a spending boost)

• Focus on tax compliance & ease of doing business - Union Budget may announce steps to reduce tax litigation, boost compliance by greater oversight of transactions and work towards the goal of bringing more firms into the fold of the formal sector. We also expect measures like single window electronic clearance system for MSMEs & Exim trade transaction, modernisation & automation of Indian ports under Ease of doing business to further improve the business environment

• Support for MSME/rural economy to be back in focus – We expect the government to extend ECLGS and other loan guarantee schemes for micro, small and medium enterprises (MSMEs), hospitality and tourism sector, and the health infrastructure beyond March 31. Also, measures like hike in MSP, agro marketing support, boost to rural infra and aid through cheaper funding can help in reviving rural economy. Boost to manufacturing - Higher allocation for PLI, rolling it out to support more sectors and rationalising of inverted import duty structure can provide more impetus to manufacturing

• Fiscal prudence to act as trigger for global bond inflows - With FY23E likely to mark a reversal of the interest rate cycle globally, fiscal prudence gains higher importance. Also, to prevent bond yields moving higher, policy measures to ensure inclusion of India's sovereign bonds in global bond indices is a key expectation from the Budget. It may bring US$20-40 billion per year and provide the much needed demand support for G-Secs

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