Increase in threshold limit for capital gains
In just over a week, Finance Minister Nirmala Sitharaman will present the Union Budget 2023-24 in Parliament. While the Budget 2023 wish-list is long, with demands from every part of the country, some key numbers will determine what the government can deliver.
Moneycontrol spoke to economists and zeroed in on these numbers and how they will dictate the government's Union Budget 2023 announcements on February 1.
Nominal GDP
The assumption of the likely growth in India's nominal GDP in 2023-24 is perhaps the most important number in the Union Budget 2023-24 as it will be directly responsible for estimates such as the fiscal deficit and the growth in tax collections.
The Centre has benefitted from two years of super-normal nominal GDP growth, helped by high inflation and a favourable base, particularly in 2021-22. Even for this financial year, the statistics ministry's first advance estimate for growth exceeded the budget's assumption of 11.1 percent by 430 basis points.
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One basis point is a hundredth of a percentage point.
However, nominal GDP growth is set to fall. According to the median of estimates of 14 economists, the budget may assume a nominal GDP growth of 10.5 percent for next year.
"…WPI inflation – which is not relevant from the monetary policy perspective but an important input in GDP deflator – could ease to as low as just 1 percent in 2023-24, down from an average WPI inflation of 11.4 percent during the past two years," analysts at Motilal Oswal Financial Services noted.
India's nominal GDP for 2022-23 is estimated at Rs 273 lakh crore. A 10.5 percent growth in 2023-24 will increase that to Rs 302 lakh crore.
The government's expenditure exceeds its income by a substantial margin. This difference is called the fiscal deficit.
There are two ways to look at the fiscal deficit – in absolute terms and as a percentage of GDP.
According to economists polled by Moneycontrol, Sitharaman may announce a fiscal deficit target of 5.9 percent of GDP for next year, down 50 basis points from this year. Economists from Goldman Sachs said this cut in the deficit will be "fully driven by a reduction in food and fertiliser subsidies."
The government's assumption of nominal GDP growth next year will influence the fiscal deficit as a percentage of GDP. Economists estimate the absolute fiscal deficit number at Rs 17.75 lakh crore, up from the budget estimate of Rs 16.61 lakh crore for the current year. A nominal GDP growth of 10.5 percent will result in a fiscal deficit of 5.9 percent.
But an increase in the nominal GDP growth assumption to 11.5 percent will narrow the fiscal deficit to 5.8 percent.
The broad path of fiscal consolidation announced by the government in February 2021 is to reach a fiscal deficit level below 4.5 percent by 2025-26.
Just like a household, the government too must balance its income and expenses.
The government finances its fiscal deficit by borrowing. While the sources of this financing are numerous – from short-term loans in the form of Treasury bills to the small savings of the public – the largest chunk is through the issuance of bonds.
Economists expect the government to issue a record Rs 15.5 lakh crore worth of bonds in 2023-24. This would be Rs 60,000 crore more than the budget estimate for the current year and over Rs 1 lakh crore higher than the actual amount that is set to be borrowed.
"In terms of other funding sources, while it is difficult to be precise, the government has been relying a lot on the small savings scheme to top up its funding. We would expect this to continue, pencilling in around Rs 5.5 lakh crore for the small savings scheme," Nomura economists said.
While the goverment's borrowing will be significantly higher in gross terms, the increase is seen smaller on a net basis. This is because bonds worth more than Rs 4 lakh crore are set to mature in 2023-24. As such, the government must borrow more to make the repayment.
A key item on the spending side will be the Centre's capital expenditure, which has surged in recent years in response to the economic slowdown caused by the coronavirus pandemic.
Capex has grown by 123 percent over the past three years: 27 percent in 2020-21, 42 percent in 2021-22, and 24 percent in 2022-23. For next year, a pullback of sorts is anticipated, with economists' estimates suggesting an 18 percent increase to another all-time high of Rs 8.88 lakh crore.
"The recovery in the capex cycle is in the nascent stages and will need continued support from the government," noted Gaura Sen Gupta, India economist at IDFC First Bank. "Given the uncertain global outlook, the recovery in private sector capex could be delayed despite domestic conditions being favourable with bank and corporate balance sheets in better shape. Hence, in 2023-24 we expect the focus on capex to be maintained."
If capex has become a major expenditure head for the Centre in recent years, on the revenue side, disinvestment has seen a fall from grace.
From a target of Rs 2.1 lakh crore in the FY21 budget, the government is expected to continue to rein in its ambition and set a goal of about Rs 50,000 crore for next year.
"Divestments have been tracking lower than the budget estimate since 2019-20," said Morgan Stanley. "Indeed, even in 2022-23, divestments are only 43.7 percent of the budgeted target of Rs 65,000 crore. We expect divestments to remain weak in 2023-24 and estimate revenues of Rs 35,000 from divestments."
Morgan Stanley's estimate for disinvestment proceeds might be at the lower end, but even the most optimistic of economists don't expect the target to be higher than that for the current year.