Budget 2023: Fiscal deficit may remain at 5.8% for FY24; Centre's borrowings to increase by Rs 0.7 lakh crore, says ICRA

The Centre and states are likely to budget for greater market borrowings of Rs 2.3 lakh crore next fiscal, despite the fact that the Union Budget may project a lower-than-expected fiscal deficit for the Centre of 5.8 per cent of GDP, said an ICRA report.

According to ICRA Ratings, higher redemptions will cause the Centre's gross market borrowings to increase to Rs 14.8 lakh crore and the States' gross market borrowings to increase by Rs 1.6 lakh crore to Rs 9.6 lakh crore in FY2024, bringing the total borrowings (of the Centre and the States) up to Rs 24.4 lakh crore, up by 2.3 lakh crore from FY23 combined.

According to the agency, the aggregate gross borrowings for the Centre and the States in FY23 are planned at Rs 22.1 lakh crore and Rs 14.1 lakh crore, respectively. The agency also anticipates that the Centre will estimate its FY24 fiscal deficit at 5.8 per cent of GDP, which is a decrease from the FY23 projection of 6.4 per cent.

Aditi Nayar, the agency's chief economist and head of research and outreach, asserted that Budget 2024 should concentrate on maintaining the momentum of domestic growth while also demonstrating a continued commitment to fiscal consolidation and limiting market borrowings in light of the impending global growth slowdown.

In addition, she anticipates that the upcoming Budget will increase the Centre's capital expenditures to Rs 8.5 -- 9 lakh crore and aim for a fiscal deficit of 5.8 per cent of GDP, helped by a reduction in subsidies. Despite this, increased redemptions will result in an increase in the Centre's gross market borrowings, which will reach Rs. 14.8 lakh crore in FY24 from Rs.

This same holds true for the states, whose gross market borrowings may increase by Rs 1.6 lakh crore to Rs 9.6 lakh crore from Rs 8 lakh crore projected for FY23. However, despite the Reserve Bank of India (RBI) receiving information to the contrary, States have not yet borrowed because of improved revenue and larger Central disbursements. They have borrowed less money overall so far this fiscal year than they did last year, by approximately 15 per cent.

She predicts that the Centre's revenue shortfall will decline from Rs 10.5 lakh crore in FY23 to Rs 9.5 lakh crore in FY24, while the fiscal deficit may only slightly decrease from Rs 17.5 lakh crore to Rs 17.3 lakh crore due to greater capex. However, it is anticipated that the budget deficit will decrease relative to GDP from the 6.4 per cent planned for this fiscal year to 5.8 per cent in FY24.

She anticipates also that the election-bound government would set aside funds for capital expenditures to increase by double digits in FY24, from FY23's budget of Rs 7.5 lakh crore to Rs 8.5-9 lakh crore. On the other hand, because of the predicted decreased food and energy prices, revenue expenditure is forecast to increase by a comparatively modest 3 per cent.

Despite the projected higher borrowing levels for the following fiscal year, the net borrowing of the Centre is anticipated to decrease to Rs 10.4 lakh crore in FY24 from Rs 10.9 lakh crore this fiscal year due to the maturity of bonds worth Rs 3.1 lakh crore, which may rise to Rs 4.4 lakh crore next fiscal year and increase the gross borrowings by Rs 0.7 lakh crore to Rs 14.8 lakh crore.

On the other hand, from the estimated Rs 5.6 lakh crore for current fiscal, the aggregate net borrowings of the states may increase by Rs 1.2 lakh crore to Rs 6.8 lakh crore in FY24. From the planned Rs 2.4 lakh crore this fiscal year to Rs 2.9 lakh crore the following fiscal year, their redemptions would increase.

According to her, as a result, the total net borrowings will increase from current fiscal year to the following fiscal year, reaching Rs. 16.5 lakh crore.

Nayar further anticipates that net tax receipts will exceed the projected amount in FY23 by a healthy Rs 2.1 lakh crore due to the strong direct tax and GST collections. Up till January 10, the direct tax mop-up increased by 24.58 per cent to Rs 14.71 lakh crore, exceeding 86 per cent of the budget forecast.

This is intended to partially balance the net cash outgoes stated in the first supplementary demand for grants as well as the shortfall in non-tax revenue and disinvestment receipts, along with expenditure reductions amounting to Rs 1 lakh crore.

She, therefore, anticipates the fiscal deficit to be higher than the budgeted sum of Rs 16.6 lakh crore in FY23, coming in at Rs 17.5 lakh crore; nevertheless, a higher-than-anticipated GDP will allow the gap to stay around the budgeted target of 6.4 per cent of GDP. 

Nayar predicts a decrease in net borrowing for the government to Rs 10.4 lakh crore in FY24 from Rs 10.9 lakh crore in FY23. The gross market borrowings, however, will increase to Rs 14.8 lakh crore from Rs 14.1 lakh crore due to increased redemptions.

States' gross borrowings, which were reduced in FY23 for a number of reasons, are expected to reach Rs 9.6 lakh crore in the following fiscal, with debt funding 75 percent of the total. Net borrowing is expected to reach Rs 6.8 lakh crore. As a result, she expects total Central and state net borrowings to climb to Rs 17.2 lakh crore in FY24, up from Rs 16.5 lakh crore in FY23. She expects the 10-year G-sec yield to rise to 7.4-7.75 percent following the budget presentation.

Nayar projects gross tax revenue for FY24 to be Rs 34 lakh crore, up 9.4 per cent from the level anticipated for FY23. Growth in direct taxes is expected to outpace that of indirect taxes, which is likely to be hampered by weak customs duty collections and a return of the excise duty on auto fuels to levels that prevailed before the pandemic.

Due to a significant increase in the amount of debt outstanding, the share of interest payments in overall spending will remain high at 24–25 per cent, highlighting the necessity to continue putting a cap on borrowing, according to Nayar.