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By Mr. Dhananjay Sinha, MD & Chief – Strategist, JM Financial Institutional Securities Limited

The aggregate fiscal construction for the FY23 union budget reflects higher than expected conservatism with a very modest expenditure expansion of 4.6% at INR 39.45tn. The emphasis continues to be on attempts to crown in private capital expenditure by continued acceleration of government capital outlay. Capital outlay for FY23 is budgeted at INR7.5tn, which is a growth of 24.6% over the revised estimate (RE) of INR 6.6tn in FY22.

Revenue expenditure which constituted 84% in FY22RE at INR 31.7tn is slated to decline to 81% in FY23BE at 31.95tn, which is flat on YoY basis (0.9% YoY). Reflecting an even more conservative view on consumption spending, the total revenue spending net of interest payments at INR 22.56tn in FY23BE is a decline of 4.1%.

Fiscal deficit FY23BE at INR 16.61tn is merely an expansion of 4.5% over FY22RE; as a ratio of GDP it is projected to decline to 6.4% from 6.9% in FY22. But more importantly, reflecting the cutback in revenue spending, the revenue deficit at INR 9.9tn is budgeted to decline by 9% YoY or 3.8% of GDP from 4.7% in FY22BE.

Thus, the budget math appears to assume a strong revival in private sector demand, both household consumption and private sector capex. The nominal GDP growth is assumed at INR 258tn or 11.1% YoY, which is a marked deceleration from FY22. Thus with both net tax revenue growth at 9.6% and total spending growth of 4.6% lower than nominal GDP growth, the role of fiscal support to the overall GDP trajectory in FY23 is expected to diminish.

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