New deficit target reduced to 5.9%
The Union Budget for the fiscal year 2023/24 sets a deficit target of only 5.9% (on a primary deficit of only 2.3% GDP – interest payments make up 24% of all budget expenditure). This is ambitious, coupled with a sizeable increase in capital expenditure that is 37.4% more than the prior year's total.
Underlying these estimates is a forecast for nominal GDP growth of 10.5% over 2022/23. This also seems about right to us, as inflation falls closer to the mid-point of the Reserve Bank of India's 4+/- 2% inflation target, and real GDP growth comes in around 6% for the year, a bit down on this year, but still one of the highest rates of growth in Asia.
For a bit of balance, we do note that in the last fiscal year, the budgeted capital expenditure fell short of achieving some of the physical targets for home building, road building and water connectivity that it was supposed to deliver. Making sure that the extra expenditure this year delivers what it is supposed to on the ground will ultimately be as important to India's long-term growth potential as meeting arbitrary deficit targets.
Helping India to achieve these underlying growth assumptions, and hence the budget projections, India's large and not particularly open economy shields it to some extent from the slowdowns we are expecting in the US and Europe. India is also not particularly exposed to the downturn in the semiconductor industry that is weighing on the exports and production outlooks for many other Asian economies, and which will likely weigh on growth at least until the middle of this year.
India is also benefitting from a more imaginative approach to foreign direct investment from many multinational corporations looking for an alternative to China following trade and tech wars. And this is resulting in increased foreign direct investment inflows that will not only provide employment but typically also boost domestic productivity and raise the potential growth rate.
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