Budget FY2024: Delivers a pro- growth road map anchored on Policy Continuity, Fiscal prudence and pump up in Capex

02 Feb 2023

Indian Finance Minister Nirmala Sitharaman presented the Union Budget for fiscal year 2023-24 on 1^st February 2023 admist a challenging backdrop of Inflation, monetary tightening, slowing growth, and international conflict. The FY24 Budget delivers strongly on Fiscal consolidation (deficit at 5.9% of GDP in FY24BE vs 6.4% in FY23RE), refraining from populism in a pre-election year and a continued emphasis on Capex.

The budget which the FM labelled the first in “Amrit Kaal” did not vary in its essentials from the growth model bulking up on capital expenditure specially on transport related infrastructure. The budget stood for resilience amidst multiple crisis with the economic growth estimated at 7% which is the highest among all major economies. Alluding to G20 presidency FM highlighted that with the theme of “Vasudhaiva Kutumbakam” Indian economy is on the right track despite a time of challenges heading towards a bright future.

Laying the Vision of Amrit Kal which envisages an empowered and inclusive economy, the Budget adopts seven priorities and act as “Saptrishis”. These are: Inclusive development, reaching the last mile, infrastructure and investment, unleashing the potential, green growth, youth power and financial sector.

Budget 2023-24 Highlights:

• Real GDP projected to grow at 6.9% in FY23 vs 8.7% in FY22.
• Capital investments outlay increased by 33% to INR 10lakh Cr @ 3.3% of GDP and three times the outlay in 2019-20.
• FY23 fiscal deficit target is projected at 6.4% of the GDP. Continuing the path of fiscal consolidation, the budget further projects fiscal deficit target for next fiscal year at 5.9% of the GDP.



• The gross market borrowings are estimated at Rs.15.4 lakh crore.
• The total receipts other than borrowings and the total expenditure are estimated at Rs.27.2 lakh crore and Rs.45 crore respectively. The net tax receipts are estimated at Rs.23.3 lakh crore
• Outlay of INR 75000 Cr for one hundred critical transport infrastructure projects, for last and first mile connectivity for ports, coal, steel, fertilizer, and food grains sectors.
• Under the new personal income tax regime, the rebate limit of INR 5 lakh is proposed to be revised to INR 7 lakh

On the budget day, markets ended on a mixed note. The BSE benchmark rose by 158.18 points or .27 per cent to settle at 59,708.08. After the FM announced the new borrowing numbers, the yield on the 10 year govt bonds softened to 7.28% from an intraday high of 7.35% . The gauge closed at 7.28 percent on 1st Feb 2022.

Citi analysts believe the growth thrust of the budget is going to come for Capex. With the normalizing economic activity, the fiscal impulse is somewhat countercyclical. They believe the nominal GDP growth target of 10.5% for FY24 (Citi-10.7%) looks realistic.

The theme of a qualitative shift in expenditure continues with the compression in expenditure growth achieved through subsidy reduction. The total expenditure growth is kept at a modest 7.5%YY despite a 37% jump planned in capital expenditure. On Budget capital expenditure

With a fiscally Prudent Budget, Citi analysts believe the budget refrained from any populist consumption push in a pre-election year. As per them a conservative fiscal policy would imply that the monetary policy would not have to double duty to take care of macro stability. While focus on capex is a welcome move, they believe lower allocation towards social security related spending could come under pressure. Citi analysts expect a 25bps hike in repo rate in the February MPC.

We present to you the key highlights of the Budget proposal**

Economics View

• FY23 Fiscal retained at 6.4% of GDP. In INR Term citi analysts expect a INR~940bn slippage
• Gross Tax revenue estimate revised upwards by INR2.85Trn with the full year estimate suggesting ~12%YY implied growth in gross tax revenue in 4QFY23
• Full year spending target revised by INR 2.4trn with subsidy accounting for INR 2.1Trn slippage.

Taxation

• Under the new personal income tax regime, the rebate limit of INR 5 lakh is proposed to be revised to INR 7 lakh.
• Income from market linked debentures is proposed to be taxed as short-term capital gains at the applicable rates.
• Income from non ULIP life insurance policies having premium above INR 5 lakh per annum is proposed to be taxed, applicable for new policies after 1st April 2023
• The surcharge rate is proposed to be reduced to 25% from 37% under the new personal income tax regime for individuals having income above INR 5 Cr which would reduce the effective tax rate by 3.74% i.e. from 42.74% to 39%

Infrastructure and Investment

• Increased capital investment outlay by 33.4% to Rs.10 lakhs crore
• Continuation of 50-year interest free loan to state government to incentivize investment
• Highest ever capital outlay of Rs.2.4lakg crore for railways
• Creating urban infrastructure in Tier 2 and 3 Cities Via Establishment of UIDF

Financial Markets, Rates and FX

• Citi analysts expect the 10y bond yields to be capped and eventually drift below 7% over the coming months. They expect the swap curve to steepen further (5y vs 1y1y) and remain biased to fade an uptick in yields.
• No major changes in capital gains /cess expected to be a relief for equities.
• Budget is overall neutral for INR as per Citi analysts. INR is likely to remain a laggard as broad USD is expected to weaken.
• The shift in expenditure mix towards Capex (infra capex growth :25% YoY vs nominal GDP /overall expenditure growth of 10.5%/7.5%YoY) expected to be positive for infrastructure and industrials.
• Effective lower taxation likely to boost consumption.

Agriculture and Cooperatives

• Building Digital Public Infrastructure
• Setting up agriculture accelerator fund
• Rs.20 Lalkh crore agricultural credit targeted at Animal Husbandry, dairy and fisheries’ sector

Health and Education

• 157 new nursing colleges to be established
• New Programme to promote research in pharmaceuticals to be launched
• National digital library to be set up for children and adolescents
• Revamped teachers training via district institutes of education and training

Inclusive Development Achievements

• 9 crore drinking water connections to rural houses
• Cash Transfer of Rs2.2 lakh crore to over 11.4 crore farmers under PM-KISAN
• Insurance Cover for 44.6 crore persons
• 47.8 crore PM jan dhan bank accounts
• 9.6 crore LPG connections under ujjawala

Key Surprises Budget 2023-24

• Dent to tax-saving investment products
• The allocation to defence capital outlay (+8% YOY vs 9% in FY23RE) was possibly weaker than anticipated
• Compensation for OMCs Omitted
• Budget has removed tax exemption available to principal repayment portion of distribution of REITs and InvITs

Other Key Announcements

• Cigarette tax increases of c2%, per Citi’s estimates, are fairly modest given that the previous increase happened in Feb’20.
• Cement benefits from overall capex focus, although offset by lower-than-expected allocation towards rural housing (+3% in FY24BE vs FY23RE).

*India Economics, Asia FX & Rates Strategy, India Equity Strategy

**For more details, please refer to the Budget Document.