The fifth and final full Budget of this government before a crucial general election next year, leans more heavily on infrastructure spending focused capital expenditure (capex). The aim is to lift a post-pandemic domestic economy out of the woods and simultaneously crowd-in private capex.
The space to do so has been created by diverting some spends towards capex and nudging the public sector enterprises (CPSEs) to reinvigorate spending.
Despite a slowing economy and hence slower growth in tax collections, in conjunction with the need to trim the fiscal deficit, capex has received its due.
Total central government budgeted capex growth is seen rising to 30 per cent from 26 per cent this fiscal. A capex support was essential in a year when global shocks, rising domestic interest rates and waning of one-time lift in contact-based services are expected to bring down economic growth.
That said, the government has largely stuck to its medium-term path of lifting productive capacity of the economy through higher infrastructure spend, rather than directly boosting consumption in a pre-election year.
But there is still some way to go in lifting the investment cycle. Recent National Statistical Office data shows fixed investments in fiscal 2023 was still about 5 per cent below the pre-Covid decadal ‘trend’.
Central government capex, though strong and in the right areas, needs States and the private sector to come in more strongly. States have lagged so far, this fiscal, with actual capex incurred by them at only 37 per cent of Budget Estimates (BE).
Private sector diffidence
Private sector investment (which is 35-40 per cent of total infrastructure plus industrial investments) is also still diffident. While corporates are primed for undertaking such investments with healthy balance sheets, the ‘animal spirits’ are yet to be unleashed.
Specifically, the sector was looking for: (i) assuredly better demand prospects; (ii) fiscal support through subsidies and facilitation for a green transition; (iii) continued push to the Production Linked Incentive (PLI) scheme, which so far has reaped noteworthy benefits in some of the sectors it covers; and (iv) stable geopolitical conditions. The last of this is though outside the realm of the Budget.
The Budget has addressed the first two areas in good measure.
First, by continuing to push infrastructure capex, the Budget tries to indirectly support the consumption cycle through employment-creation. This is complemented by direct tax changes which will mildly support consumption demand from households. The tax concession to the lower income brackets will leave more money in their hands providing some support to low ticket consumption items which are awaiting recovery
Second, with one of the seven Saptarishi pillars dedicated to ‘green growth’, this Budget gives a bigger push to facilitate green transition and reduce carbon intensity. In addition to the recent allocation for the Green Hydrogen Mission, this Budget also facilitates investment and a shift towards greener fuel, energy, mobility, and methods of farming and efficient use of energy. A mix of fiscal support through capex and subsidies is being pursued.
In our estimate, the Budget scores relatively high on transparency and prudence.
For one, despite the pressure on revenue spending, the government managed to achieve the fiscal deficit target of 6.4 per cent of GDP in fiscal 2023 — supported by higher nominal GDP growth and tax collections. With the fiscal deficit ratio budgeted at 5.9 per cent in fiscal 2024, the Budget once again put the deficit on the glide path to 4.5 per cent of GDP by fiscal 2026.
By reducing dependence on off-Budget, below the line items, it maintains its tilt towards transparency. We also find the nominal growth assumption of 10.5 per cent realistic and tax collection targets achievable. CRISIL expects real and nominal growth at 6 per cent and 10.5 per cent respectively in fiscal 2024.
Two, while total budgetary capex is seen rising, there is a prominent shift in the expenditure mix. Effective revenue spending share in GDP is budgeted to fall to 10.4 per cent in fiscal 2024 from 11.5 per cent in fiscal 2023 as the subsidy burden comes down, while share of budgetary capex rises to 4.5 per cent from 3.9 per cent.
A fiscally leaner Budget will assist monetary policy in inflation control.
The Budget thus attempts an act of balancing the competing needs of the economy and fiscal consolidation.
The continued government capex coupled with a gradual pick-up in private sector spending would act as offsets, but uncertainties abound.
Global slowdown will hit exports, and any further sharp increase in interest rates from systemically important central banks could induce capital volatility. The faster-than-expected revival in China’s economy could also create demand-supply mismatches and push prices up. The geopolitical environment offers no comfort at this juncture.
If some of these risks materialise, the Budget math could go awry just as it did last year. Only a nimble approach can save the day.
Joshi is Chief Economist and Deshpande is Principal Economist; Crisil Ltd