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The central government’s FY24 Budget was growth supportive whilst sticking with a modest glide path for consolidation. The underlying math was reasonable as it factored in the upcoming moderation in nominal GDP growth, and lower tax buoyancy, whilst prioritising long-gestation capex spending. This is the last full Budget ahead of general elections in 1H24. Accompanying sectoral announcements were a mix of tweaks to the personal income tax brackets (to provide support to the salaried class), changes in custom duties to support local manufacturing, and targeting green transition goals, which was balanced by higher allocation towards MSME credit guarantee schemes, skill upgradation and other inclusive welfare goals. The medium-term path of further fiscal rationalisation remains in place as the government reinforced its target of lowering the deficit to -4.5% of GDP by FY26.

Budget 2024 (FY24) – key fiscal parameters

Fiscal deficit targets: The FY23 Budget deficit was maintained at -6.4% of GDP, whilst FY24 deficit was set at -5.9%, as we expected in our preview note. The 0.5% of GDP consolidation factors in an increase in capex spending (~0.7% of GDP), which is being offset a) deeper cut in revenue expenditure (% of GDP), b) higher net tax revenues; c) lower allocation towards subsidies. Our preferred gauge of primary deficit excluding one-off revenues is set to ease to -2.5% of GDP vs -3.2% in FY23. For now, the nominal GDP growth rate will be higher than nominal borrowing costs (10Y as proxy), keeping the debt matrix in reasonable shape.

Growth and revenue assumptions: The underlying nominal GDP growth assumption was reasonable at 10.5% in FY24 vs 15.4% in FY23 RE - a function of moderation in real GDP as well as deflators. Gross tax revenues assume a tax buoyancy of ~1.0x. Receipts from dividends and profits factored a small pick-up from FY23, whilst the divestment target was little changed despite the risk of missing the FY23 RE target. Adjustments to the personal income tax slabs might result in potential revenue loss of ~INR 350bn (0.12% of GDP).

Expenditure orientation: Capital expenditure allocation has been raised sharply to INR10trn (3.3% of GDP), including the interest-free capex loans to states, vs INR7.5trn in FY23. Revenue expenditure growth is expected to stay nearly flat (1% yoy) in FY24, with significant savings on subsidies (~0.7% of GDP) helping to absorb the sharp increase in capex heads. Encouragingly revenue spend (nett of subsidies and interest payments) vs capital expenditure ratio is set to halve from 3-4 years back, boding well for quality of expenditure.

Borrowings: Gross borrowing has been set at INR 15.4trn vs INR 14.2trn in FY23 RE and INR 11.8trn on net basis (vs INR 11.1trn in FY23 RE.

Underlying math

FY23: The centre is on course to meet the budgeted -6.4% of GDP target. Under the hood, the revised revenue deficit is set to rise to -4.1% (0.3% higher than BE) likely reflecting the increase in the subsidy burden on the back of a sharp rally in commodities and pandemic-era food support. The FY23 revised estimate (RE) has built in an INR 2.4trn overshoot in the net tax revenues, benefiting from strong direct and GST tax collections. Notably, the revised divestment target has been retained at INR600bn, but the current run-rate poses downside risks. Under expenditure, revenue expenditure is expected to increase sharply as subsidies overshot budgeted targets, even as capital expenditure remains apace. Lastly, the strong growth turn provides a significant cushion to the overall fiscal math.

FY24: Gross tax revenues are expected to rise around the same pace as nominal GDP, keeping the tax buoyancy at ~1.0x. Nonetheless, direct tax collections are expected to maintain a strong beat (see table on last page), besides GST receipts pegged at 3.2% of GDP, a shade higher than FY23. The divestment target is more upbeat than the run-rate, likely building in the favourable market conditions and timely sale of state’s stakes for assets in the pipeline.

The expenditure side of the math expects largely flat growth in revenue spends, which might be at risk if a renewed commodity upturn pushes up subsidies. The projected ~0.7% of GDP worth savings in subsidies (see table) has been channeled towards a sharp increase in capital outlays. Capex has been pegged at INR10trn (3.3% of GDP), which includes interest free loans towards states’ capex, compared to INR 7.5trn in FY23 RE. If we add, grants in aid for creation of capital assets i.e., allocations under Demand driven/entitlement-based scheme MGNREGS, then the scale increases to INR 13.7trn (4.5% of GDP). Roads and highways, besides Railways, saw a large jump in allocations, whilst the rest were flat to slower (see chart on left).

Encouragingly the ratio of revenue expenditure (nett of interest payments) vs capital spends continues to improve for the third year in a row.

Outlay on major schemes: Digging deeper, outlays towards support schemes are a mixed bag. For instance, allocations towards the rural employment scheme, MNREGA, is lower at INR 600bn vs revised INR 894bn in FY23. On the other hand, PM Awas Yojana (housing) is up at INR 795bn vs INR 771bn (FY23 RE).

Key announcements 

Taxation: Personal tax regime, introduced in 2020 with six slabs, has been rationalised to five, besides an increase in the basic exemption limit to INR 300k (see table below). Surcharge rates applicable to the highest income bracket has been reduced (effectively lowering the maximum tax rate to 39% from 42.7%) as well as extending some relief to pensioners. The new regime has been made the default tax structure. In the spirit of better targeting of tax concessions and exemptions, the deduction from capital gains on investment in residential house and income tax exemption from proceeds of insurance policies with very high value will be capped.

There were further changes to the custom duties to promote and support local manufacturing capabilities. Under the tax rate changes, jewellery, plastic goods, high end electronic items etc are expected to get dearer, whilst items like camera lens, parts of open cells of TV panels etc will enjoy low or be exempted from duties.

Green transition: The National Green Hydrogen Mission (outlay INR 197bn) is expected to facilitate transition of the economy to low carbon intensity, reduce dependence on fossil fuel imports, and make the country assume technology and market leadership in this sunrise sector. Separately, INR 350bn has been set aside towards energy transition and net zero objectives, and energy security by Ministry of Petroleum & Natural Gas.

Welfare and social sector schemes: The budget announcement carried a multi-pronged emphasis on inclusive development, skill upgradation, steps to improve youth employability, and introduction of technology into agriculture. The credit guarantee limit for MSMEs has been enhanced.

Market implications

Bond markets witnessed kneejerk gains as FY23 gross borrowings was not raised and FY24 issuance was within expectations. Gross borrowing for FY24 has been set at INR 15.4trn vs INR 14.2trn in FY23 RE and INR 11.8trn on net basis (vs INR 11.1trn in FY23 RE). Amongst the other financing items, the high contribution of small saving scheme might be at risk as banks continue to offer competing deposit returns.  Looking ahead, market conditions might be less conducive in FY24 on account of a narrower liquidity balance, squeeze on banks as credit growth continues to outpace deposit generation hurting incremental demand for bonds as well as limited progress on global bond index inclusion plans. This increases the likelihood that the central bank might show its hand via open market operations in the course of the year to contain unexpected volatility.

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