The Union Budgets for FY2022 and FY2023 were presented amidst extraordinary circumstances, owing to the sharp economic disruptions caused by Covid-19. They strived to support the economic recovery via large increases in the Central Government’s capital expenditure (+76 per cent between FY21 and FY23) and assistance to vulnerable groups, while ensuring fiscal correction from the exceptionally high levels of the fiscal deficit seen in FY2021 (9.2 per cent of GDP).

While the domestic recovery has since gained traction, sectoral trends remain uneven. Additionally, fresh challenges have emerged on the external front, owing to a looming global growth slowdown and elevated geopolitical uncertainty. This implies that the upcoming FY24 Budget will also face the dilemma of having to choose between augmenting domestic growth impulses and cutting back on the fiscal deficit, which remains well above the pre-Covid as well as acceptable levels.

We at ICRA expect the expansion in nominal GDP growth to moderate to around 10 per cent in FY24 from the 15.4 per cent estimated by the NSO as per its First Advance Estimates, on the back of a likely softening in inflation and the consequent impact on the GDP deflator. Gross tax revenues are, thereby, expected to rise by 9.4 per cent in FY24, in line with the decadal average tax buoyancy of around 1.0 seen during FY2010-19.

The growth in non-tax revenues is also expected to be quite modest amidst expectations of a decline in dividend/surplus from the Reserve Bank of India, PSUs, nationalised banks, etc., and flattish receipts from the telecom sector.

The actual disinvestment receipts would be contingent on realisation of big-ticket deals as well as the evolving market scenario. Thus, a moderate budgetary target of around ₹0.5 trillion on this account may be considered realistic by the market.

Overall, the combined revenue receipts and disinvestment receipts of the Government are expected to grow 8-9 per cent in FY24, from the expected level for FY23. Fortunately, lower spending on food and fertiliser subsidies would enable the Government to contain the growth in its revenue expenditure at around 3 per cent in FY24, while creating room for more productive spending.

We foresee a double-digit growth in capex to ₹8.5-9 trillion from the ₹7.5 trillion expected in FY23. Key infrastructure segments like roads, railways, urban infrastructure and power are likely to receive higher capex allocations. We also anticipate incremental allocations towards NaBFID and the NIIF to help them ramp-up their lending/investment.

Moreover, some of the PSU general insurance entities would need further support from the Government via fresh capital infusion. However, we do not envisage any budgetary allocation for recapitalising public sector banks, given their healthy capital and solvency position. Notably, the interest-free 50-year capex loan scheme for State governments had already been augmented to ₹1 trillion in FY23 BE from under ₹0.2 trillion in the previous two years. The actual utilisation of this scheme, which has been less-than-brisk so far, may guide whether its outlay is enhanced further.

We project the Government’s fiscal deficit to ease marginally to ₹17.3 trillion in FY24 from the ₹17.5 trillion expected in FY23. However, as a proportion of GDP, it is likely to display a reasonably robust consolidation to 5.8 per cent in FY24 from 6.4 per cent projected in FY23.

Market borrowings

Given our estimates for the fiscal deficit, we expect the net G-sec issuance to decline by 5 per cent to ₹10.4 trillion in FY24 from the ₹10.9 trillion estimated for FY23. However, a considerable jump in redemptions entails a 6 per cent rise in gross market issuances of the Centre to ₹14.8 trillion in FY24.

What of the States? State government market borrowings have been compressed in FY23 for a variety of reasons. In fact, the issuance of State Government Securities (SGS) has sharply trailed the indicated amount in two of the first three auctions of this quarter.

We have made the following baseline assumptions: the States’ fiscal deficit will be in line with the normal borrowing limit of 3 per cent of the Gross State Domestic Product (GSDP) recommended by the Fifteenth Finance Commission for State governments for FY24, three-fourths of which will be funded by the SGS. Accordingly, we estimate that net SGS issuance could rise to ₹6.8 trillion in FY24, from under ₹5.6 trillion in FY23. Further, higher redemptions will take the gross issuances of SGS to ₹9.6 trillion in FY24 from under ₹8 trillion in FY23.

This implies that the net and gross market borrowings of the general government (that is, Centre plus States) will rise by ₹0.7 trillion and ₹2.3 trillion, respectively, in FY24 vis-à-vis FY23, to ₹17.2 trillion and ₹24.4 trillion, respectively.

This is likely to exert pressure on yields, pushing up the 10-year G-sec yield to 7.4-7.75 per cent, even if the Monetary Policy Committee chooses to pause in February 2023, following the lower-than-expected CPI and WPI prints for December 2022.

The writer is Chief Economist, ICRA Ltd

A considerable jump in redemptions will entail

a 6 per cent rise in

gross market issuances of the Centre to ₹14.8 trillion

in FY24.