The Union Budget for FY24 is just around the corner, and we expect it to remain focused on pro-growth initiatives such as continued investment in infrastructure and capacity development.
Also, considering it is the final full budget ahead of general elections in 2024, the Government could announce some benefits and policies aimed at the rural sector to boost languishing demand.
Therefore, although we cannot expect significant fiscal consolidation in this Budget, we hope the Government provides a clear glide path to achieve the fiscal deficit target of 5.0-4.5% by FY25 or FY26.
Expected Fiscal deficit glide path:
Here are the themes we expect to see in this year's budget announcements:
• Rationalization of personal income tax to encourage consumption
Reducing personal income tax would increase the disposable income among the salaried class and spur demand. It has been almost a decade since income tax deduction limits were changed. In 2019, corporate taxes were slashed to 25% from almost 35%. Hence, citizens across the spectrum would be eagerly awaiting reduction in personal income tax. With rising retail participation in the equity market, it would be interesting to see whether the government takes the bait to rationalize the capital gains tax structure.
Reducing personal income tax would increase the disposable income among the salaried class and spur demand. It has been almost a decade since income tax deduction limits were changed. In 2019, corporate taxes were slashed to 25% from almost 35%. Hence, citizens across the spectrum would be eagerly awaiting reduction in personal income tax. With rising retail participation in the equity market, it would be interesting to see whether the government takes the bait to rationalize the capital gains tax structure.
• Focus on rural infrastructure projects to generate employment
Post pandemic, urban demand has picked up but rural demand is yet to pick up. Since this is a pre-election year, there should be considerable support for the rural sector for galvanizing demand and generating employment. To meet these objectives, the government may look at providing direct stimulus packages, speed up rural infrastructure, offer cheaper credit and focus on implementing productivity improvement measures.
Post pandemic, urban demand has picked up but rural demand is yet to pick up. Since this is a pre-election year, there should be considerable support for the rural sector for galvanizing demand and generating employment. To meet these objectives, the government may look at providing direct stimulus packages, speed up rural infrastructure, offer cheaper credit and focus on implementing productivity improvement measures.
• Focus on rural infrastructure projects to generate employment
Post pandemic, urban demand has picked up but rural demand is yet to pick up. Since this is a pre-election year, there should be considerable support for the rural sector for galvanizing demand and generating employment. To meet these objectives, the government may look at providing direct stimulus packages, speed up rural infrastructure, offer cheaper credit and focus on implementing productivity improvement measures.
Post pandemic, urban demand has picked up but rural demand is yet to pick up. Since this is a pre-election year, there should be considerable support for the rural sector for galvanizing demand and generating employment. To meet these objectives, the government may look at providing direct stimulus packages, speed up rural infrastructure, offer cheaper credit and focus on implementing productivity improvement measures.
• Continued push for manufacturing through PLI
In the upcoming budget, we are hoping that the government will continue to show their support for manufacturing growth in order to help achieve the goals of self-reliance and job creation. One way they might do this is by extending coverage of the Production Linked Incentive Scheme (PLI) to a few more sectors.Since its introduction in March 2020, the PLI scheme has been incredibly successful. It currently covers 14 sectors with a total outlay of ~Rs2.5 trillion – i.e., nearly 1% of GDP. These projects are estimated to add 0.3-0.8% to GDP every year over the next 5-6 years, as well as create nearly 4 million new jobs. There's a good chance that the government may raise the allocation for some existing sectors, or even extend benefits to other sectors such as footwear, toys, cotton-based textiles, bicyles, and furniture.
In the upcoming budget, we are hoping that the government will continue to show their support for manufacturing growth in order to help achieve the goals of self-reliance and job creation. One way they might do this is by extending coverage of the Production Linked Incentive Scheme (PLI) to a few more sectors.Since its introduction in March 2020, the PLI scheme has been incredibly successful. It currently covers 14 sectors with a total outlay of ~Rs2.5 trillion – i.e., nearly 1% of GDP. These projects are estimated to add 0.3-0.8% to GDP every year over the next 5-6 years, as well as create nearly 4 million new jobs. There's a good chance that the government may raise the allocation for some existing sectors, or even extend benefits to other sectors such as footwear, toys, cotton-based textiles, bicyles, and furniture.
• Increased capital expenditure towards infrastructure projects
Further, we expect that the government should increase its capital expenditure budget in order to invest more in infrastructure sectors. Doing so would help boost demand, spur private investment, create jobs and provide ease of goods movement- all of which are needed for sustained high economic growth going forward. In the last year's budget, the total capital expenditure for FY23 was increased by 24% to a record Rs 7.5 trillion. This is more than double the amount that was spent in FY20.
Further, we expect that the government should increase its capital expenditure budget in order to invest more in infrastructure sectors. Doing so would help boost demand, spur private investment, create jobs and provide ease of goods movement- all of which are needed for sustained high economic growth going forward. In the last year's budget, the total capital expenditure for FY23 was increased by 24% to a record Rs 7.5 trillion. This is more than double the amount that was spent in FY20.
In the first 8 months of the fiscal year leading up to November 2022, the government has spent Rs 4.47 trillion, which is 59.6% of the total budgeted amount for the year. Notably, this is 63% higher than the amount spent in the same period last year.
We expect that the government will continue with its current momentum and increase the total capital expenditure as a percentage of GDP to ~3% in the financial year 2024, amounting to Rs 10 trillion.
We expect that the government will continue with its current momentum and increase the total capital expenditure as a percentage of GDP to ~3% in the financial year 2024, amounting to Rs 10 trillion.
• A clear roadmap for fiscal consolidation glide path
As we approach the election year, it will be interesting to see how the government balances growth and social welfare spending with fiscal consolidation. Even though the government would probably want to keep sops and subsidies elevated for the year, they may still end up adhering to fiscal consolidation targets.
As we approach the election year, it will be interesting to see how the government balances growth and social welfare spending with fiscal consolidation. Even though the government would probably want to keep sops and subsidies elevated for the year, they may still end up adhering to fiscal consolidation targets.
We base this assumption on the fact that GST collections have been rising steadily during FY23. In the first 9 months of the current fiscal year, GST collections reached Rs 13.4 trillion as compared to Rs 14.87 trillion collected over the full year FY22.
Further, as per the first advance estimates provided by MOSPI, the nominal GDP for FY23 is likely to be higher at Rs 273.08 trillion in FY 23, compared to the earlier provisional estimate of Rs 236.65 trillion for FY22.
Further, as per the first advance estimates provided by MOSPI, the nominal GDP for FY23 is likely to be higher at Rs 273.08 trillion in FY 23, compared to the earlier provisional estimate of Rs 236.65 trillion for FY22.
We anticipate that the government will be able to reduce the fiscal deficit in FY24 to ~6% because of the rise in revenue collection and better than expected GDP performance. We are also hopeful that they will be able to provide a clearer map to reduce the deficit further to 5.0-4.5% by FY26.