Budget to focus on fiscal consolidation, cap fiscal gap at 5.9%: Report

Mumbai: The forthcoming budget is likely to meet the targeted 6.4 percent fiscal deficit and pencil in for 50-bps reduction for the next fiscal, said a foreign brokerage report. The Modi government will present its last full budget on February 1 as the budget 2024 will be a vote on account because the nation will be heading for the hustings from April next year. Finance Minister Nirmala Sitharaman had recently said that she would meet the fiscal targets as budgeted given the more than budgeted tax collections.

'Commodities shock forced incremental spending on food & fertiliser subsidies'

The commodities shock forced incremental spending on food and fertiliser subsidies and exhausted the fiscal room from higher tax buoyancy. Apart from this, the government has also tabled extra demand for spending before Parliament, comprising 0.8 per cent of GDP or Rs 2.2 lakh crore in December, mainly towards capital expenditure, rural development and defence.

Wall Street brokerage Goldman Sachs in a report on Tuesday said that it expects the government to meet the budgeted fiscal deficit target of 6.4 percent of GDP, with an expenditure compression to the tune of 0.3 percent of GDP from the budgeted spending to cushion the incremental subsidies due to the commodity shock.

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Direct & indirect taxes tracking well ahead of budget estimates

The brokerage also expects the finance minister to budget for a 50-bps reduction in fiscal deficit for FY24 at 5.9 percent, fully driven by a reduction in food and fertiliser subsidies and project tax revenues to remain buoyant in the year, which is sort of walking the fiscal consolidation path. Their optimism comes from the direct and indirect taxes, which are tracking well ahead of budget estimates, even though the government is set to widely miss the disinvestment target.

The brokerage expects the budget to stick to the medium-term fiscal consolidation path, weigh spending priorities on capex, manufacturing incentives, subsidies and welfare, and limit its market borrowing to the extent that it does not hurt markets.

Govt will increase capex allocation towards infrastructure

Given that it's a pre-election budget, the brokerage said that the government will increase capex allocation towards infrastructure, mainly towards roads and railways, slashing defence spending and increase allocation towards rural spendings and welfare measures, such as education and healthcare.

The government borrowing will remain elevated in FY24, which may require the RBI to restart OMO purchases in the second half of FY24 with domestic liquidity constraints abating, as per the report.

The report also rules out any major reforms to be announced in the budget, except for some details on PLI incentives and a roadmap on direct tax code implementation, along with the rationalisation of subsidies, particularly fertilisers.

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