In a year of lower growth, Union Budget 2023-24 roots for infrastructure expansion

FY24 Union Budget lays a solid foundation for a robust medium to long-term growth.

In brief

• Despite a transitory dip in real growth in FY24, India is projected to remain the global growth leader in the medium term.
• The Union Budget 2023-24 gave a direct push to growth through sharply accelerating infrastructure spending in the wake of a global economic slowdown.
• While supporting growth, the union government also signaled resumption of fiscal consolidation by reducing its fiscal deficit to GDP ratio from 6.4% in FY23 (RE) to 5.9% in FY24 (BE).

Global headwinds force a dip in growth

The IMF’s January 2023 update of the World Economic Outlook projects a global economic slowdown, with the world growth slowing to 2.9% in 2023 as compared to 3.4% in 2022. Growth rates across major economies/regions are expected to fall across the board in 2023. India is no exception in this context, although it remains a global growth leader among major economies in all years of the forecast period, namely 2022, 2023 and 2024 (FY23, FY24 and FY25 for India).

The global demand slowdown may adversely affect the demand for India’s exports. In FY23, the contribution of net exports to real growth is estimated to be negative at (-)2.8% points. This is due to a much lower growth in exports at 12.5% as compared to a higher imports growth at 20.9%. The current account deficit (CAD) relative to GDP in 1HFY23 was at 3.3% and is expected to improve in 2HFY23. For the full year, it may turn out to be close to 3%. Although global growth would slow down further in 2023, commodity prices may also fall. The price effect may be larger than the trade magnitude effect, and both net exports and CAD may perform better in FY24 as compared to FY23.  

Overall budgetary balance: accommodating deficit reduction

The gross tax revenues (GTR) of the GoI are budgeted at 11.14% of GDP in FY24, the same level as in FY23. The net tax revenues relative to GDP are however, budgeted to increase marginally, which reflects some adjustment in states’ share in GoI’s GTR (Table 1). This increase amounts to 0.08% points of GDP. An additional 0.04% points were added to GoI’s net revenue receipts on account of non-tax revenues. Thus, GoI’s net revenue receipts are budgeted to increase by 0.12% points in FY24 as compared to FY23. Non-debt capital receipts are budgeted to fall by 0.03% points in FY24. Thus, in order to accommodate a reduction in fiscal deficit of 0.5% points of GDP, a reduction in total expenditure to GDP ratio to the extent of 0.41% points has been necessitated. Furthermore, capital expenditure has been increased by 0.65% points. Thus, the total burden of adjustment has been shouldered by revenue expenditure, which has fallen by 1.06% points. The stimulus to growth therefore comes from a change in the composition of expenditure in favor of capital expenditure.

Given such a large thrust on infrastructure expansion through the budget, it is useful to identify the beneficiary sectors. These are roads and bridges and the commercial lines of Indian railways. In terms of magnitude, there are sharp increases for petroleum and for north-eastern areas as well. However, their share in total infrastructure expenditure remains limited at 3.5% and 2.5%, respectively.

Infrastructure expansion: states brought on board

Apart from the growth stimulating effect of an increase in GoI’s capital expenditure, which is budgeted to grow by 37.4% in FY24 as compared to 22.8% in FY23 (RE), several provisions have been made to incentivize the state governments also to augment their capital expenditures. First, grants have been given to the states for capital asset creation, amounting to 1.2% of GDP. Second, an interest-free loan for 50 years has been extended to states for capital expenditures in FY24. For this purpose, the GoI has provided an outlay of INR1.37 lakh crore. Third, the fiscal deficit limit of the states has also been retained at the higher level of 3.5% of GSDP for FY24 as compared to the FRBM target level of 3% of GDP. Assuming that states fully utilize these facilities, the consolidated fiscal deficit of central and state governments would be 9.4% of GDP.

If all of the permitted fiscal deficit, that is, 3.5% of GDP is used by states for capital asset creation along with the additional 1.2% of GDP received as grants for the purpose of capital asset creation, total capital expenditures on account of states considered together would be 4.7% of GDP in FY24.

GoI’s capital expenditure in FY24 can be estimated as their fiscal deficit (5.9% of GDP) net of revenue deficit (2.9% of GDP). This amounts to 3% of GDP. In addition, central public sector undertakings (PSUs) have investment plans amounting to 1.1% of GDP. Thus, public sector investment, considering central and state governments and central PSUs would be 8.8% of GDP.  

Resumption of fiscal consolidation 

GoI has realized its budgeted fiscal deficit to GDP target for FY23 at 6.4% according to the RE (Chart 1). Even after this, a considerable distance remains from the FRBM operational target of 3% of GDP. The government signaled its determination to move toward this target, even though constrained by the ongoing global economic slowdown. Thus, it has budgeted a reduction of 0.5% points of GDP, targeting to reach a level of 5.9% in FY24. GoI has also indicated that it intends to reach a level of 4.5% by FY26, implying that a reduction of 0.7% points of GDP each would be required in the next two years. However, the GoI has not indicated as to the year by which it would reach the FRBM target of 3% nor has it indicated whether it intends to reach that level at all. The FC15 had suggested setting up of a High-Powered Intergovernmental Group to review the 2018 amendment of the FRBMA. Perhaps this group may be able to examine the matter afresh.