Fiscal Consolidation, But Capex Push Remains Alive: HDFC Bank Reviews Union Budget 2023

The HDFC Bank Economic Research Team consisting of Abheek Barua, Sakshi Gupta, Avni Jain, Swati Arora and Mayank Kumar Jha has prepared the Budget review 2023-24 from both financial and economic standpoint. Their conclusion was Fiscal consolidation, but capex push remains alive.

Key Highlights

Paying heed to fiscal consolidation:

Fiscal deficit target reduced to 5.9% of GDP in FY24 from 6.4% in FY23, government focussed on achieving 4.5% fiscal deficit target by 2025-26.

Capex outlay increased further to INR 10 lakh cr (3.3% of GDP) comprises of INR 5.2 trn in infra spending; INR 1.3 trn in interest free loans to states.

Spending space created by a decline in the subsidy bill and reduction or freezing the allocation for certain schemes like MNREGS, PM Kisan etc.

Spending mix improves:

Revenue exp/capex ratio declines to 3.5 in FY24 from 4.75 in FY23 RE. A lower ratio indicates better spending mix.

Revenue receipts assumptions seem broadly realistic and seem to reflect the slowdown in nominal growth expected in FY24 (10.5%). Gross tax collections are expected to grow by 10.4% in FY24 down from 12.3% in FY23-RE.

Consumption boost: The rationalization of tax slabs under the new tax regime along with the increase in income rebate from INR 5 lakh to INR 7 lakh to provide a boost to consumption and increase savings.

Borrowings:
• FY24 Budget pegs gross market borrowings at INR 15.4 trn and net borrowings at INR 11.8 trn. The reliance on small savings has been kept high both for FY23 and FY24 – might be an optimistic assumption.
• Financing the slippage in FY23: While the government has achieved the FY23 target of 6.4%, in level terms there is a slippage of INR 1 lakh cr. The funding for this is accounted for by higher short-term borrowings than budgeted (+ INR 50,000 cr) and other receipts.

Yields: The 10 year bond yield dropped by 6.6bps to 7.277% post the budget announcement on a lower than expected borrowing figure. We continue to expect the bond yield to moderate further and trade closer to 7.1% in H1 FY24. That said, the absolute amount of borrowings continue to remain sizeable and should put a floor for yields.

Revenue Collections: Realistic Assumptions

Revenue receipts assumptions seem broadly realistic and seem to reflect the slowdown in nominal growth expected in FY24 (10.5%). Gross tax collections are expected to grow by 10.4% in FY24 down from 12% in FY23. The assumptions for disinvestments at INR 51,000 cr are not overtly ambitious as well. The collections under GST although could be marginally lower than assumed in the budget for FY24.

• Revenue receipts estimated to grow by 12.1%- looks achievable
• Realistic assumption of direct tax- income and corporate taxgrowth at 10.5%
• Customs and excise collections are kept largely flat- perhapsreflecting expectations of a slowdown in trade
• GST collections look upbeat : Monthly run rate assumed at INR1.6 lakh vs. 1.4 lakh for FY23 RE
• Nominal GDP growth assumption is in line with our estimate:10.5% y-o-y growth in FY24

Change in (New) Income Tax Regime

• The Government rationalised income tax stabs under the new tax regime. Further, the highest surcharge rate under the new regime is reduced to 25%from 37% previously.
• The rebate limit is increased to INR 7 lakh from INR 5 lakh under the new regime ->People with income up to 7 lakh will not have to pay any tax.
• This revision is expected to impact Government’s revenue by INR 35K Cr annually.

• On the consumption front, this could put some extra money in tax payers’ hands and support demand and increase savings.

Expenditure: No compromise on capex

With uncertainties surrounding global economic environment, government is banking on capital expenditure to crowd-in private investment

Capex increased to INR 10 lakh crore:

Budgetary support for capital expenditure increased by nearly 37% in FY24 budget estimates over revised estimates for FY23.

Revenue expenditure excluding interest payments and subsidies (IPS):

Total revenue expenditure excluding interest payments, pensions and subsidies amounts to INR 18.1 lakh crore which is 40% of total expenditure — the lowest over the last 5 years

Quality of expenditure:

Quality of expenditure has improved in FY24 on account of consolidation in expenditure on interest payments, pensions and subsidies. The revenue exp/capex ratio has reduced to 3.5 in FY24 BE from 4.75 in FY23 RE.

Focus on infrastructure development

• Increasing share of infrastructure spending: Infrastructure spending (driven by roads, railways, energy transition, telecom) increased from INR 1.2 lakh crore in FY20 and INR 3.6 lakh cr in FY23 to INR 5.2 lakh crore in FY24

Budgetary support driving capital expenditure, share of extra-budgetary resources declines

Gross budgetary support to capital expenditure: Gross budgetary support to capital expenditure has increased nearly three-fold over the last five years, from INR 3.4 lakh crore in FY20 to INR 10.0 lakh crore in FY24.
 Share of GBS in gross capital expenditure: Share of budgetary support to total capital expenditure has increased from nearly one-third in FY20 to two-thirds in FY24, with extra budgetary resources (IEBR) now constituting only a third of total capex.

Substantial reduction in budgeted subsidies

Subsidy estimates revised downwards: While food subsidy has been reduced by INR 0.9 lakh crore in FY24 budget estimates, fertiliser subsidy has seen a reduction of INR 0.5 lakh crore.

Risk — Subsidy estimates have a tendency to get revised upwards: Given the Covid-19 related stress, government revised up subsidy bill over the past few years.
Given the geopolitical uncertainty coupled with suboptimal agriculture performance, may put these estimates under stress

Spending on Major Schemes