The Union Budget has budgeted for a big push to capex, attempting only modest fiscal consolidation. The fiscal deficit to GDP ratio is projected to ease somewhat to 6.4% in FY2023 from 6.9% in FY2022, and is much higher than market expectations. Nevertheless, the absolute size of the deficit is projected to rise to ₹16.6 trillion from ₹15.9 trillion estimated in FY2022.
The increase in the size of the absolute deficit can largely be attributed to a sharp hike in capital spending, by as much as 24.5% to ₹7.5 trillion in FY2023 from the revised ₹6 trillion in FY2022. This increase is driven by four major factors: a large increase in allocation for the roads sector, a capital infusion into BSNL, and as much as ₹1 trillion as special assistance to the States for capital spending. The sharp increase in the allocation for capex has the potential to impart durability to the growth momentum and ‘crowd in’ investments by the private sector.
The Government of India (GoI) has offset the expansion in capex by remaining rather prudent on revenue expenditure, which is budgeted to rise by a mere 0.9% in FY2023. Consequently, total spending is projected to increase by a modest 4.6% in FY2023. More importantly, the relatively larger hike in capex vis-à-vis revex is expected to lead to an improvement in the GoI’s spending quality, with capex accounting for 19% of total spending in FY2023, up from 16% projected in FY2022 and an average of 12.6% during FY2019-2021. This is the best spending mix in 18 years.
We believe that there are limited downside risks to the fiscal targets for FY2023. This is because the GoI has budgeted for a moderate growth in gross tax collections of 9.6%. Besides, the budgeted numbers for receipts on account of disinvestment are also quite realistic at ₹650 billion.
These assumptions lend a fair degree of credibility to the Budget math. With the increase in the size of the fiscal deficit, the GoI’s gross and net market borrowings are estimated to witness a steep expansion to ₹15 trillion and ₹11.2 trillion, respectively, from ₹10.5 trillion and ₹7.8 trillion in FY2022. This has impacted the bond market sentiments, given the prevailing expectations of a decline in borrowings.
High crude oil prices, inflationary pressures and the U.S. Fed signalling towards multiple rate hikes over CY2022 have already led to a rise in G-sec yields over the last two months. This coupled with elevated borrowing levels and ICRA’s expectation of a change in the RBI’s monetary policy stance to neutral in April 2022, followed by rate hikes of 50 bps in FY2023 are expected to continue to push yields higher.
Ramnath Krishnan, MD and Group CEO, ICRA Limited