Ahead of the national elections, the last full budget of the Modi government is likely to boost welfare spending with a focus on rural and infra capex, according to a report.
However, it may pencil in for a lower fiscal gap at 5.8 per cent next fiscal, given the likely reduction in subsidies, even though nominal GDP growth is likely to fall by a third to 10.5 per cent, it added.
The government is likely to miss the medium-term fiscal roadmap of bringing down the fiscal deficit to 4.5 per cent by FY26, given the overall domestic and global slowdown, as per the report by Swiss brokerage UBS.
The government will present its last full budget on February 1 amid global and domestic headwinds.
The nation is bound for hustings mid-next 2024, which will have its sway on the budget, the report said, adding the government is expected to support growth by boosting welfare spending, albeit within fiscal boundaries, which will also help it manage macro stability risks amid the rising global uncertainty.
Bringing down the fiscal deficit to 4.5 per cent of GDP by FY26 looks ambitious, UBS India economist Tanvee Gupta-Jain said in a note on Wednesday.
She also expects a slowdown in nominal GDP growth to 10.5 per cent in FY24 from an estimated 15.4 per cent in FY23. But this is possible only if the tax buoyancy remains at 1, similar to the pre-pandemic period (FY10-FY19).
Jain also sees a moderation in gross tax revenue growth to around 9 per cent next fiscal from 15.5 per cent during April-November 2022.
The report expects the forthcoming budget to boost rural spending and maintain double-digit growth in public capex in FY24.
“Even as we assume slower tax revenue growth on moderation in nominal GDP growth, a lower subsidy burden largely led by food and fertilisers will help create fiscal space to reallocate money towards existing rural schemes, including rural jobs, rural housing and roads,” the report said.
The report expects the government to continue to increase allocation to boost manufacturing under the production-linked incentive scheme, along with other measures.
Expecting higher capex and rural spending to be the likely priorities of the budget, Jain said rural spending to get a USD 10 billion boost or 15 per cent over FY23 next fiscal and maintain the double-digit growth in public capex, offering at least 20 per cent more allocation, with a focus on roads, highways, railways and ports, among others.
She also said that the quality of government spending is expected to improve, with the share of capex rising to 20 per cent from an average of 13 per cent during FY10-19.
The subsidy burden is also likely to ease significantly to Rs 4 lakh crore or 1.3 per cent of GDP from Rs 5.8 lakh crore or 2.1 per cent of GDP estimated for FY23, on discontinuation of the free food scheme and falling fertiliser prices.
On the market, the report said the Nifty EPS is likely to print a 10.5 per cent CAGR over the next three years, lower than the 11 per cent in the past five years and does not expect any significant upsides to the earnings estimates at the index level.
Over the past 10 years, Nifty has generated an average return of 0.6 per cent on the budget day, with an equal split between positive and negative returns. Its 12-month Nifty target is 18,000 a 60 bps downside from the current level.
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