Budget for the Amrit Kaal: Powered by capex, rooted in fiscal consolidation

• Finance minister Nirmala Sitharaman’s Budget 2023 has set the tone for the Indian economy’s longer-term future, or the Amrit Kaal, as the government put it.
  
• The broad consensus amongst analysts is that the government’s focus on capital expenditure and conservatism on welfare schemes has improved the quality of spending.
  
• Going forward, analysts expect cyclical and capital-intensive sectors like infrastructure to benefit from the government’s economic direction.
  

Finance minister Nirmala Sitharaman’s Budget 2023 has set the tone for the Indian economy’s longer-term future by making room for fiscal consolidation while still boosting the government’s capital expenditure investments, made possible by cutting down on populism, say analysts.

This is crucial especially at a time when the global economy is expected to slow down – according to the International Monetary Fund’s latest World Economic Outlook, the global economy is projected to grow at 2.9% in 2023, significantly lower than the historical average of 3.8%.

“The Budget has tried to strike some balance between fiscal consolidation and growth, by continuing its focus on capital expenditure and creating fiscal space for that by cutting revenue expenditure,” said a report by CRISIL.

Fiscal discipline is an easy casualty in pre-election budgets, since public interest and desire to engage in populism to curry favour with the electorate is at its highest during these times, as far as budgets are concerned.

However, analysts expected the government to keep its fiscal consolidation policy on track, and as such, the announcements to cut revenue expenditure did not come as a surprise.

“The government continued with its thrust on capex, in-line with our expectation, and did not increase welfare spending,” said a report by Goldman Sachs.

Populism out, fiscal prudence in: On expected lines, say analysts

Amongst the populist measures which have seen a cutdown in Budget 2023 are food and fertilizer subsidies, which have been reduced by 31% and 22% year-on-year to ₹1.97 lakh crore and ₹1.75 lakh crore in FY24 respectively.

In sharp contrast, capital expenditure outlay has been increased by 33% to ₹10 lakh crore for FY24. When compared to FY19, this is a three-fold increase.

Sitharaman said that the government will meet the fiscal deficit target of 6.4% of the gross domestic product (GDP) in FY23, while the FY24 target has been set at 5.9%.

Subsequentially, its target for FY25-26 is more ambitious, with the fiscal deficit projected to be less than 4.5%.

The claw down on populism has been received well by economists and experts, who have called this year’s budget a “force multiplier”.

“In keeping with its focus on inclusive growth, the Union Budget has hiked outlays on infrastructure and agriculture which in our view would have a force multiplier impact on the economy,” said S Ranganathan, head of research at LKP Securities.

Sitharaman also announced that the gross borrowings are estimated at ₹15.43 lakh crore in FY24, lower than the Economic Survey 2023 estimate of ₹15.77 lakh crore. This should also lead to a moderation in the 10-year bond yields to 7-7.1% in FY24, according to Abheek Barua, chief economist, HDFC Bank.

Preparing for a world with slower economic growth

With analysts expecting a slowdown in the world economy, analysts say the Budget has been set with this in mind – this is evident from the government’s smarter allocation of funds to capex while trimming down welfare schemes.

The government also expects a moderation in the GDP growth going forward – the Indian economy is projected to grow 7% in FY23, further moderating to 6-6.8% in FY24.

However, brokerages are relatively conservative in their estimates, pegging GDP to grow between 6% to 6.5% in FY24.

“Slower global growth will hit India’s exports, while tight financial conditions in the country could weaken domestic demand, cumulatively leading to lower revenue growth compared with this fiscal,” said the CRISIL report.

On the flip side, moderating inflation will help the government in reducing its food and fertilizer subsidy bills, the report added.

The slowdown in exports, combined with the thrust on capex mean that the Indian economy’s growth will be aided by domestic demand instead, according to the analysts at KPMG.

“The lending capacity of banks having cleaner balance sheets, the ability of companies with lower debt to borrow, and the government’s digital investments are three key growth magnets for the coming years,” the financial advisory firm said in its report.

Fiscal deficit targets ‘ambitious’, but ‘quality’ of spending better

However, analysts at Motilal Oswal noted that the government’s fiscal deficit target of 4.5% in FY25-26 could prove to be a challenge. “It is possible only and only if the government keeps its spending growth extremely muted for the subsequent two years, thus restricting its ability to support economic growth,” the brokerage said.

It added that the ambitious spending cuts could result in the government falling short of its target in FY24 – either in terms of fiscal deficit, or the market borrowing target it has set for itself.

“Government continues to focus on better spending quality,” the brokerage said, given that the focus was on capex over welfare measures.

‘Positive for infrastructure and capex-sensitive sectors’

The broader consensus amongst analysts is that the spending allocations have been done in a smart manner. A moderation in subsidies and allocation of more funds for capex are expected to hit two targets with a single stone, being lower fiscal deficit, and keeping the economy chugging along.

“Our equity strategists view the budget as positive for infrastructure and capex-sensitive sectors, given the large capex outlays in the budgets. Our sector analysts also think that the budget is positive for industrials and infrastructure,” said a Goldman Sachs report.

The government’s capex push will benefit infrastructure and capex-sensitive sectors. As far as the markets are concerned, analysts believe cyclical and capital-intensive stocks will benefit the most.

“We prefer BFSI, IT, Industrials, Auto and Cement while we are underweight on Energy in our model portfolio,” said Motilal Oswal, adding that going forward, factors like the upcoming policy meet of the Reserve Bank of India will be important to understand the monetary direction in the near-term.

Earlier, a report by ICICI Securities had outlined how cyclical and capital-intensive stocks have outperformed since FY21. The central bank’s expectation of a revival of India Inc’s capital expenditure cycle, and now the government’s capex push has aligned the stars for cyclical and capital-intensive stocks to continue performing well.

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Indian economy projected to grow between 6-6.8% in FY24; private capex necessary for job creation: Economic Survey 2023