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With expectations of moderating consumption and investment growth, Jeremy Zook, director, Asia Sovereign Ratings, Fitch Ratings, said the Union Budget for FY24 will maintain relatively high rates of capex considering the Centre’s focus on growth. In an emailed interview, Zook said the government will set a fiscal deficit target of 6% of gross domestic product to remain consistent with the objective of gradual consolidation. However, Zook said it will be challenging for the Centre to achieve the 4.5% of GDP fiscal deficit target by FY26. Edited excerpts:

In the outlook report, Fitch estimated India’s growth to slow sharply to 6.2% in FY24 from 7% in 2022-23 due to external factors. How significant is the risk from the resurgence of covid- 19 originating from China?

Risks to India’s outlook are primarily related to global economic conditions. The potential emergence of new variants remains a possible tail risk for both the Indian and global economy. Nonetheless, India has weathered global surges in covid over the past year due to the emergence of Omicron quite well from an economic perspective and we expect this to continue even with the sharp rise in cases in China. China’s rapid shift away from its zero-covid strategy, while causing near-term disruptions, could add upside for its economic outlook in the latter part of 2023. The impact of this on India is subject to significant uncertainty and would likely be mixed. On the one hand, global growth prospects could be more supportive, but on the other, commodity price and inflationary pressures could prove more challenging than our current baseline.

Consumption growth is expected to moderate with falling demand. What will be the impact on private investment in Q3 FY23 and FY24?

We forecast the pace of both consumption and investment growth to moderate in FY24, but to be relatively resilient. A sharp ramp-up in the private investment cycle is being constrained by economic uncertainty and risk aversion. Lagged impacts of monetary tightening are also likely to weigh on investment. Despite the near-term headwinds, we think India is well-placed for robust investment growth in the medium term, given the improvement in corporate and bank balance sheets over the past several years.

Will the Centre raise expenditure next year as well? What is your expectation for capex allocation for FY24?

The government successfully sustained its ramp-up in capex spending over the past year, despite other spending pressures from a rising subsidy bill. Higher capex spending may be positive for the medium-term growth outlook as it helps to fill infrastructure gaps and foster private sector investment. Our expectation is that the government will seek to maintain relatively high rates of capex in the budget given its growth focus.

What are the key expectations from the budget? Which areas should the government focus on in view of global economic uncertainty?

We expect the Centre to set a 6% of GDP deficit target in its upcoming budget to remain consistent with its objective of gradual consolidation. We think the government will seek to support the growth outlook through a sustained focus on capex spending. Slower nominal growth in the coming fiscal year is likely to lower revenue growth and trimming spending would likely be needed to narrow the deficit, which could prove challenging amid weakening economic momentum.

Do you expect rate hikes in 2023?

We don’t forecast any rate hike in 2023. Headline inflation has peaked and trending down to within the target band, which gives RBI scope to pause its rate hike cycle before beginning to cut rates in 2024. Still, in view of the stubbornly high core inflation, we may see a rate hike by RBI in the coming months. However, we think that slowing demand and declining input prices should help to ease core inflationary pressures without additional hikes.

Should the Centre scale the capex programme for state governments?

States play an important role in India’s capex drive, given their constitutional responsibilities, and support from the Centre will help facilitate more effective capex spending.

Do you think the 2023-24 budget being the last full one before general elections may impact the government’s fiscal consolidation path?

Our baseline expectation is that gradual consolidation continues despite the upcoming general elections in 2024 given the government’s commitments in this area and the high fiscal deficit level after two global shocks. Fiscal pressures could arise from upcoming national elections in May 2024, but the incumbent government’s dominant political position likely limits these risks.

How important will it be for the government to stick with the fiscal consolidation roadmap of 4.5% of GDP by 2025-26?

A sustained focus on meeting the FY26 fiscal deficit target would be supportive of the rating, as it would signal the government’s commitment to fiscal consolidation. It would also likely facilitate a stabilization or slight downward trend in the government debt/GDP ratio under our current nominal growth assumptions. Nevertheless, we believe that it will be quite challenging for the government to achieve the 4.5% of GDP target by FY26 and our latest baseline forecasts did not show the government achieving this objective. Moreover, a 4.5% of GDP central government deficit is still well above peer levels, while the states will have an additional deficit of 2.5-3.0%.

ABOUT THE AUTHOR

Dilasha Seth

" Dilasha Seth is a journalist reporting on macroeconomic policy for the last 11 years. She writes extensively on issues including international trade, macroeconomic data, fiscal policy, and taxation. At Mint, she reports on trade deals that India is signing besides key policy decisions of the Ministry of Finance. She closely tracked and covered the transition to the goods and services tax (GST) regime in 2017 and also writes on direct tax-related issues. In the past, she has worked with Business Standard and The Economic Times. She is based in Bangalore."
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