Budget likely to target 5% fiscal deficit with revenue upside: Aditi Nayar

Budget 2024: As India braces for its first budget under a renewed mandate, all eyes are on how the government will navigate the economic landscape fraught with economic challenges and opportunities. In an exclusive conversation with Republic Business, Aditi Nayar, Chief Economist and Head Of Research, at ICRA, predicts a delicate balance between capitalising on a revenue surplus and steering fiscal consolidation, while addressing pressing needs like rural welfare and sustainable growth.

Edited Excerpts

On Budget expectation

It’s the first budget of a fresh term for this government. There's limited time between the election results and the full budget. So what we would expect is that the full prioritisation and the full kind of agenda may be presented in the next budget or over the next few months in this budget.

Our expectation is on two, or three counts. I'll just outline what we're expecting to see. First of all, there seems to be a little bit of a revenue upside in terms of both tax and non-tax revenues as compared to what had been penciled in at the time of the interim budget, which was presented in February.

How will that revenue upside get spent? That's what we're looking forward to seeing, the split between revenue and capital expenditure, and whether a portion of this revenue upside can be channelled towards faster fiscal consolidation in FY25 as compared to what was envisioned last year. Now, there are always competing priorities on expenditure.

Capital expenditure had already been given a fairly good step up in the entire budget and given the fact that after the budget, we will still be in monsoon mode for the next couple of months, possibly increasing the capex budget further beyond what was penciled into the interim budget may not necessarily be very easy to spend in a curtailed number of months that we will have left with us.

So what we're likely to see is some increase in the revenue expenditure part of the budget. Perhaps some rural-focused schemes may get a step up in the allocation. And what we would like to see is that at least some part of the revenue upside gets channelised towards a tighter fiscal deficit in FY25, perhaps closer to 5 per cent of GDP because next year, when we have a full year for expenditure ahead of us, it's going to be incrementally more difficult to get to that 4.5 per cent of GDP fiscal deficit target that the government had committed to for FY26.

On capital expenditure

Even at the time of the interim budget, it's not that it was a very mild increase in capital expenditure that had been penciled in within the overall capital expenditure budget. If we talk about what was the incremental capital expenditure between the FY24 RE and the FY25 interim budget estimate, a portion of that was actually kind of, in a sense, unallocated. It was not clearly defined what scheme that additional capital expenditure would be toward.

So that is what we expect will now be clarified in the full budget. What is that extra capital expenditure going to be toward beyond what was already penciled in the interim budget? I'm not sure that it is going to be feasible. That's the word you used to absorb the entire capital expenditure in the months which will be remaining after the monsoon is over.

Therefore, perhaps even if we see an increase in the capex budget, I would wonder if we're going to be able to effectively spend it all in FY 25. So instead of that, perhaps some of that could be channelised towards a faster fiscal consolidation instead.

On private capex

It's quite interesting. Our observation is that there is a lot of private sector capex which is happening in small measure. So we see small, realistic capex announcements coming through in capacity in sectors where capacity utilisation is on the higher side. We'd heard from the RBI governor that capacity utilisation for a smaller set of entities had crossed 75-76 per cent in Q4.  The final data point will probably be out with the August MPC review.

In several traditional sectors, and new-age sectors, we do see capacity being added, but it's not a very exuberant capex cycle. We don't keep hearing of very large capacities being added other than a few sectors. So, like, for instance, we've seen these mega airline aircraft orders which have been announced in the last couple of years, but other announcements are more modest in scale.

So the perception is that private sector capex is sort of not happening, whereas it is, but it's in a much more modest fashion. So if you talk about sectors like cement and steel, you're traditional sectors, or you talk about new age sectors like data centres, EV, auto in general, if you talk about hotels, which is the services sector, we do keep hearing capacity expansion announcements. But somehow the perception is quite different this time around as compared to sort of the mega capex booms that we saw in the early 2000s.

And I'm not sure that we're going to go back to that kind of a private sector capex cycle. A lot has happened in the last 20-odd years between the banking sector cleanup, between IBC and NCLT, and I think we're going to end up with much more realistic and hopefully more sustainable private sector capex announcements going ahead.

On prioritising allocation for welfare measure

Both are important, both serve different purposes. If there are parts of the economy that are. See, what's happening with our growth is,  it's very high, it's much higher than what we're seeing in the rest of the world, but it is uneven.

And there are going to be parts of the economy that need a little more support than what the headline, 7-8 per cent GDP growth rates would suggest. So, within the spending question, which is available, prioritisation of spending to support those segments where times are a little tougher, is something that would be appropriate. For instance, we had a very uneven monsoon last year, and this year as well, the progress of the monsoon has been rather, I mean, I'm going to use the same word again.

Anyway, we've seen the monsoon progressing well in southern India, but it's kind of, at least till yesterday, it was a little stuck over eastern India, just not progressing forward. We've got a lot of rain in Delhi today. So hopefully that means that there has been a good amount of movement in the monsoon in terms of the way that it's captured by the IMD.

So from the rural sector, again, there are so many ways that it ties into the overall economy, particularly in terms of the implications for food inflation, etcetera. So that is perhaps something that the market seems to be widely expecting some measures to support the rural economy and perhaps that is something that the budget will try to address.

On fiscal deficit

Our sense of the revenue upside is about Rs 1.2 trillion above what was penciled into the interim budget estimates. So that the amount of money can be either spent on higher capex or used towards fiscal consolidation.

So it will depend on how much capex, our revenue is added and how much goes to the fiscal consolidation side. So 4.95 per cent, as an economist working with a rating agency, I think that is something that we would be really happy to see if the expenditure is kept balanced and that much of the fiscal space is taken to lowering the fiscal deficit this year.

Because next year we believe, unless there is a lot of revenue upside, it will be difficult to have reasonable growth in capex, as well as bring the fiscal deficit down to four and a half per cent of GDP.

On rural economy

The sense I have is that the farm part of the rural economy has perhaps had a tough time since last year's uneven monsoon, and the expectation was that we would end up with an above-normal monsoon this year.

Looks like it's going to end up getting concentrated in the last three months of this monsoon season. That's not necessarily the best in terms of the distribution. We have to wait and see.

A good amount of rainfall in July supports sowing, but extra rainfall in August and September can be more damaging than favourable. So a lot of dynamics need to play out on the monsoon side. And if we end up with a well-distributed monsoon from here, if sowing is positive, if yields are looking good, then at the end of the monsoon season, perhaps there will be a lot more confidence coming into the farm economy and that should support rural sentiment and demand.

On allocation towards rural infra

Why not? I think that is one of the areas that the government should focus on going ahead in terms of its overall capex spend.

On divestment

See, what happens is if we have a large target for divestment and a few months pass and we don't see much movement on the ground, then it puts a lot of question mark on the overall fiscal deficit being achieved. So perhaps it is better to not have a very explicit target or have a very modest target as far as the divestment is concerned, and any upside which is there then really turns out to be an upside and achievement of the stated fiscal deficit target is not questioned.

On growth forecast

Around 10.8 per cent is the number that we are working with. We forecast that there are going to be transient factors which will dampen the gross value added or the GVA growth in Q1  and also a little bit in Q2, and we end up with back-ended prints above 7 per cent for the GVA in q three and q four for the year as a whole.

Right now we're working with about 6.8 per cent GDP growth on the real side and 10.8 per cent is the number that we're working with on the nominal side.

On headwinds

Some are temporary, transient, like the overhang of last year's bad monsoon. Some, again, are very temporary, like typically there are some, we see that capex tends to slow down during the election months. That is something that will now be behind us.

Then, of course, a monsoon. Typically we see that capex again is a little slower during the monsoon months. So in Q1 and Q2, there would be some headwinds.

Other than that, we're not seeing a very clear strong pickup in exports. And also commodity prices are now higher than where they were last year. So that's going to have some impact on corporate margins and therefore on the gross value-added growth going ahead.