Budget likely to cap fiscal deficit at 5.8% for FY24; Centre’s borrowings to rise

The Centre and States are likely to budget for higher market borrowings to the tune of ₹2.3 lakh crore next fiscal even though the Union budget may peg a lower-than-expected fiscal deficit for the Centre at 5.8% of GDP, says a report.

ICRA Ratings anticipates higher redemptions will lead to gross market borrowings of the Centre to rise to ₹14.8 lakh crore and of the states to jump by ₹1.6 lakh crore to ₹9.6 lakh crore, taking the combined borrowings (of the Centre and the states) to ₹24.4 lakh crore in FY2024, up by 2.3 lakh crore from FY23 combined.

In FY23, the Centre’s gross borrowings are budgeted at ₹14.1 lakh crore and of the states at ₹8 lakh crore, or a combined borrowing of ₹22.1 lakh crore, according to the agency.

The agency also expects the Centre to peg its FY24 fiscal deficit at 5.8% of the GDP, a moderation from 6.4% projected for FY23.

According to Aditi Nayar, the chief economist and the head of research and outreach at the agency, with a global growth slowdown looming large, budget 2024 needs to focus on sustaining the domestic growth momentum, while at the same time demonstrating a continued commitment towards fiscal consolidation in addition to limiting market borrowings.

She also expects the forthcoming budget to enhance the Centre’s capex to Rs 8.5-9 lakh crore and target a lower fiscal deficit of 5.8 per cent of GDP, aided by lower subsidies. Despite this, higher redemptions will enlarge the Centre’s gross market borrowings to ₹14.8 lakh crore in FY24 from ₹14.1 lakh crore in FY23.

The same applies to the states as well, and their gross market borrowings may jump by ₹1.6 lakh crore to ₹9.6 lakh crore from ₹8 lakh crore budgeted for FY23. However, states have not been so far borrowing as intimated to the Reserve Bank due to better revenue and higher Central payouts. Overall their borrowing is lower than last year’s by almost 15 per cent so far this fiscal.

She expects the revenue deficit to fall to ₹9.5 lakh crore in FY24 from ₹10.5 lakh crore in FY23 for the Centre, while the fiscal deficit may fall only mildly to ₹17.3 lakh crore from ₹17.5 lakh crore led by higher capex. Nevertheless, as a proportion of GDP, the fiscal deficit is expected to ease to 5.8% in FY24 from 6.4% projected for this fiscal.

She expects the poll-bound government to budget for double-digit growth in capital expenditure at ₹8.5-9 lakh crore in  FY24, up from ₹7.5 lakh crore in FY23. On the other hand, revenue spending is expected to rise by a relatively muted 3%, due to the likely lower food and fertiliser subsidies.

Of the projected higher borrowings next fiscal, net borrowing of the Centre is likely to fall to ₹10.4 lakh crore in FY24 from ₹10.9 lakh crore this fiscal, as bonds worth ₹3.1 lakh crore are up for redemption this fiscal, which may rise to ₹4.4 lakh crore next, and increase the gross borrowings by ₹0.7 lakh crore to ₹14.8 lakh crore.

On the other hand, the combined net borrowings of the states may rise by ₹1.2 lakh crore to ₹6.8 lakh crore in FY24 from the budgeted ₹5.6 lakh crore for this fiscal. Their redemptions will rise from the budgeted ₹2.4 lakh crore this fiscal to ₹2.9 lakh crore next fiscal.

This will have the combined net borrowings rising to ₹16.5 lakh crore from this fiscal to ₹17.2 lakh crore next fiscal, according to her.

Given the robust direct tax and GST collections, Nayar also expects net tax receipts to overshoot the budgeted amount by a healthy ₹2.1 lakh crore in FY23. Direct tax mop-up grew 24.58% to ₹14.71 lakh crore till January 10, which is more than 86 per cent of the budget estimate.

This, combined with expenditure savings to the tune of ₹1 lakh crore is expected to partly offset the net cash outgoes announced in the first supplementary demand for grants and the shortfall in non-tax revenue and disinvestment receipts.

As a result, she expects the fiscal deficit to print in at ₹17.5 lakh crore in FY23, exceeding the budgeted amount of Rs 16.6 lakh crore; but a larger-than-estimated GDP will allow the gap to remain at the budgeted target of 6.4% of GDP.

Nayar expects the government to net borrow ₹10.4 lakh crore in FY24, down from ₹10.9 lakh crore in FY23. But higher redemptions will have the gross market borrowings to rise to ₹14.8 lakh crore from ₹14.1 lakh crore.

States’ gross borrowings, which have been compressed in FY23 for a variety of reasons, to touch ₹9.6 lakh crore in the coming fiscal and assuming that 75% of this is funded by debt, their net borrowing will touch ₹6.8 lakh crore.

Accordingly, she estimates the total Central and state net borrowings to rise to ₹17.2 lakh crore in FY24 from ₹16.5 lakh crore in FY23. This is likely to push up the 10-year G-sec yield to 7.4-7.75% after the presentation of the budget, she said.

Nayar estimates gross tax revenue in FY24 at ₹34 lakh crore, a 9.4% expansion over the projected level for FY23, with growth in direct taxes likely to outpace that of indirect taxes, which is likely to be roiled by poor customs duty collections and reversion of excise duty on auto fuels to pre-pandemic levels.

The share of interest payments in total expenditure will remain elevated at 24-25%, owing to a large increase in the debt outstanding, underscoring the need to limit borrowings, going ahead, Nayar said.