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Union Budget musings!

 Only unbridled Govt borrowings can crowd out Private investment.FS Somanathan clearly articulated in the post budget press conference that Nominal GDP growth will b 10.5% and incremental Govt Borrowings will grow only 8% or less & therefore, not a problem. As rightly said, Govt Capex will have multiplier effects and will crowd in Private investments.

Capex is 3.2% of GDP which  means about 55% of Fiscal Deficit of 5.9% will be used for Capex.That will have huge impact on job creation and other multiplier ripples across the Economy. Capital expenditure is estimated to be Rs 10,00,961 crore (37.4% increase over FY22-23).  The increase in capital expenditure is due to an increase in capital outlay on transport (including railways, roads and bridges, and inland water transport) by Rs 1,28,863 crore (36.1% increase)

Revenue deficit in 2023-24 is targeted at 2.9% of GDP, which is lower than the revised estimate of 4.1% in 2022-23(original BE for FY 22-23 was 3.8%).  Fiscal deficit in 2023-24 is targeted at 5.9% of GDP, lower than the revised estimate of 6.4% of GDP in 2022-23.  While the revised estimate as a percentage of GDP is the same as the budget estimate, in nominal terms, fiscal deficit would be higher by Rs 94,123 crore (increase of 5.7%) in 2022-23.  Interest expenditure at Rs 10,79,971 crore is estimated to be 41% of revenue receipts.The target for primary deficit (which is fiscal deficit excluding interest payments) in BE 2023-24 is 2.3% of GDP as against 3% in RE for FY 22-23(BE was 2.8%).

All the trajectories of deficits are on a downward trend since the end of pandemic and rightly so in tandem with Monetary tightening happening under Monetary Policy of RBI.But the downside is growth may get hampered may be after a long of 4to 6 months when Global headwinds are also expected to hit the demand in the Indian Economy.

Therefore front loading of Capex by GOI is the right strategy to keep up the demand momentum in the domestic economy. By the time Global slowdown or recession starts gnawing at our economy, RBI may have to tweek its Monetary Policy accordingly to shore up the sentiments.
In all probability, this situation has to be watched out for during second half of FY 23-24 as things stand and if El Nino plays out leading to deficient monsoon little earlier also.

Govt should keep an eye on Pvt Sector Capex growth minus the PLI scheme and also focus on MSME Investment growth. If possible, MSME and Pvt sector outside PLI scheme should be supported by increasing Depreciation rates for the next couple of years as an adhoc measure.
This will be mostly revenue neutral since any loss through higher depcn rates will be offset through tax revenue from higher economic activity.

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