The Budget 2023 will be tabled on February 1, marking the last full presentation before the 2024 general elections.
According to a report by DBS Group Research (DBS), the upcoming Budget is likely to prioritise rural focus, capex, manufacturing push and macro stability.
Let's understand the four likely Budget priorities:
Rural economy and social welfare push: The rural economy is likely to be one of the focus areas, especially after real wage growth stagnated in 2022 due to high inflation, increase in input prices and volatility in weather conditions, said DBS. One potential area is increasing allocations towards the rural employment scheme MNREGA vs FY23’s ₹73,000 crore (0.3 percent of GDP), predicted DBS. Besides this, further impetus to allied schemes such as crop insurance, rural road infrastructure, low-cost housing, power and utilities, food-processing industry, etc. are other focus areas, it added.
Higher investments into health and education are likely to remain one of the key demands, it added. There have been calls for the income tax exemption limit to be raised from the current ₹2.5 lakh, but this demand might revive the debate over the lack of a wider tax base to make up for missed revenues, it added.
Manufacturing push/PLI: DBS expects the manufacturing push and supply chain reorientation to be a priority in the year ahead. Fiscal incentives, like the production linked scheme, have been beneficial for many sectors, especially electronics including mobile production, it pointed out. Authorities plan to extend this incentive to green hydrogen manufacturing. Other demands included an extension of the capital support for the electronics sector (under SPECS) and higher outlay, it added. Other efforts could also focus on improving the ease of doing business by administrative (e.g., National Single Window System) and supply-side measures, it said.
Total public sector capex in view: The need to spur a revival in the investment cycle still rests on the public sector, as a slowdown in global growth and tighter financial conditions emerge, noted the brokerage. The budgeted center’s capex stood at ₹7.5 lakh crore in FY23, up 27 percent vs ₹5.9 lakh crore in FY22 (actual), with 60 percent disbursed by November 2022. DBS expects the FY24 target to be in the region of ₹9-9.5 lakh crore, higher by 0.2 percent of GDP.
It noted that the likely focus will be on supplementing existing institutional structures to support a strong infrastructure push via the National Infrastructure Pipeline (NIP) and funding mechanisms such as the asset monetisation program and National Bank for Financing Infrastructure. Press reports suggest that budgetary support to infrastructure ministries might be linked to their asset monetisation performance in FY24 after the FY23 target of ₹1.62 lakh crore may be missed, it added.
Prioritising macro-stability: DBS expects the central government to prioritise macro-stability by sticking with the fiscal consolidation path, and steering clear of overtly populist measures. Revenue projections for FY24 are likely to assume further improvement but the scale of increase will be muted, given anticipated moderation in nominal GDP growth, it noted. It expects the upcoming FY24 Budget to peg the deficit at -5.9 percent of GDP vs FY23’s -6.4 percent. In the FY22 Budget, the government projected the fiscal glide path to lower the deficit to -4.5 percent of GDP by FY26, implying an average of 60 bps reduction in the deficit annually. DBS expects the target to be maintained.
MARKET IMPLICATIONS
As per the brokerage, bond yields, especially shorter tenors, rose by over 200 bps in CY22 on the back of a shift to a tighter policy regime, sticky inflation, and upward movement in global rates, while 10-year yields are up 100 bps. This has led the rupee yield curve (2-10 years) to flatten compared to 2021, with the short-end driven up the RBI MPC’s hawkish overtures, while demand from domestic investors helped the rest of the curve – commercial banks, provident funds, corporates supportive of the long-end.
The forward-looking direction for bond yields will hinge on the makeup of the FY24 borrowings. “Working with our estimate of the deficit scale, gross bond issuance is likely in the region of ₹15.5 lakh crore (including ₹4.4 lakh crore repayments due in FY24, not net of GST compensation),” it said.
"Domestic investors will be key in the bond markets, much like recent years, while markets eye announcements to facilitate inclusion of INR bonds into global indices. Towards borrowing costs, the nominal GDP on average is likely to be higher than nominal borrowing costs (10-Year as proxy) in FY24, for a second consecutive year," predicted the brokerage.
