India Fiscal February 2022

India: FY 2023 budget unveiled in February

Revenue is to rise more than spending, leading to a reduction in the fiscal deficit.

The budget largely avoids populist measures, focusing instead on boosting medium-term growth.

Small downside risk to the sustainability of public finances is posed by further economic shocks.

Impact on fiscal metrics: The budget pencils in a fiscal deficit of 5.9% in FY 2023 from an estimated 6.4% in FY 2022. Spending is to rise by 7.5% and revenue by 12.1%. The government also committed to medium-term fiscal consolidation, with the deficit to fall to 4.5% by FY 2025. These fiscal plans are based upon the assumption that nominal GDP will grow 10.5% in FY 2023, which our Consensus forecast suggests is realistic. The plans were mostly well received by the market. That said, the fiscal deficit will remain sizeable, which means that a sudden downturn in economic growth could jeopardize the sustainability of public finances.

Impact on economic growth: While the government cut spending on subsidies—which were largely Covid-19 related—in the budget, it hiked capital spending by 33%. Given that capital spending normally has a high fiscal multiplier, it is likely that these spending plans will help raise medium-term GDP growth. That said, a downside risk is posed by underspending. This has occurred in the current fiscal year; capex projects often face obstacles such as pinning down the best-value projects, implementing them on the ground, and coordinating between different government agencies.

Impact on bond market: Bond yields fell following the announcement of the budget and the government’s fiscal consolidation plan and projected market borrowing, which came in below expectations. That said, the government is still set to borrow a record INR 15.4 trillion to help fund the budget, helping to support government bond yields ahead.

Impact on inflation and Reserve Bank of India policy: Capital expenditure typically raises aggregate supply as well as aggregate demand. As a result, the budget’s focus on capex means the additional spending announced is unlikely to significantly stoke inflationary pressures and require central bank action.

Fitch Ratings noted the risk posed to fiscal metrics by weaker-than-expected growth:

“The fiscal deficit-reduction plans outlined in India’s< latest budget on 1 February should help to stabilise general government debt/GDP levels over the medium term. The budget’s forecasts are broadly consistent with our prior assumptions, so should not significantly change our view of the sovereign’s credit profile. However, the slow fiscal consolidation process in the wake of the Covid-19 pandemic could leave the public finances exposed in the event of further major economic shocks.” Meanwhile, analysts at Goldman Sachs were upbeat on the budget: “The budget ticked all essential macro-prudential boxes: a) it budgeted for a central government fiscal deficit of 5.9% of GDP in FY24, down from a budgeted 6.4% of GDP in FY23 while reiterating commitment to the medium-term fiscal consolidation path, b) the fiscal consolidation came with largely realistic budgeted tax buoyancy assumptions, c) the government focused on a better quality of spending by increasing capex allocation […] while cutting subsidies […] and d) it budgeted for a reduction in net market borrowing.”

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