Normalised expectations; fiscal prudence in focus: Budget 2023

Fiscal deficit target for FY23RE and FY24BE has been pegged at 6.4% and 5.9%, respectively. The fiscal deficit and the borrowing estimate were largely in line. The continuation of fiscal glide path over the next two years is also positive.

Targeted Fiscal Deficit to be below 4.5% by 2025-26

GST monthly revenue continues to be around Rs 1.5 lakh crore

Government’s fiscal position  (Rs Lakh crore)

Government’s fiscal position (As % of GDP)

Key points considered:

• Nominal GDP growth for FY24RE has been pegged at 10.5%, which is largely in line with consensus estimate
• Gross tax revenue growth is set at 10.4% for FY24E with expected direct tax revenue growth of 10.5%. Within indirect taxes, GST revenues are likely to grow 12.0% while excise duty revenue is likely to grow at a lower rate of 5.9% mainly due reduced excise duty on petrol & diesel
• Fiscal deficit of 3.5% of GDP allowed for States(0.5% tied to Power sector reforms)
• Disinvestment target for FY23RE revised downward to Rs 50,000 core vs. earlier budgeted target of Rs 65,000 crore. For FY24E, it is pegged at Rs 51,000 crore, which we believe is a conservative estimate
• Higher allocation towards capital expenditure is the highlight of the Budget. Capital expenditure has been increased by 33% to Rs 10 lakh crore. Accordingly, capex allocation has been increased from 2.7% of GDP in FY23 to 3.3% of GDP in FY24

Measures to address rise in Current account deficit(CAD)/Imports

The Gems & Jewellery sector occupies an important position in the Indian economy. However, higher reliance on imports of gold and rough diamonds is one of the key contributors to rising CAD challenges (~11% of total imports). To address the same, the government announced two critical measures in the Union Budget 2023-24:  

Promotion of lab grown diamonds ecosystem in India:

• Provision of grants to encourage indigenous production of lab grown diamonds (LGD) seeds & machines and to reduce cost of production via abolishing of basic customs duty on imported seeds used for LGD
• LGD in India are gaining prominence owing to standardised characteristics and lower pricing (50-60% cheaper)
• Scaling up of LGD manufacturing ecosystem and gradual consumer acceptance to reduce dependence on imports of rough diamonds

Incentivising gold monetisation scheme

• Not treating conversion of gold into electronic gold receipt and vice versa as capital gain
• The measure aims to further improve gold monetisation scheme leading to enhanced availability and reducing gold imports (as per industry estimates, Indian families hold ~25,000 tonnes of gold)

Electronic imports is the fourth largest component with ~10% contribution in overall imports. During current Union Budget 2023-24, the government has announced steps to further reduce dependency of mobile/TV imports and to enhance the value chain of component manufacturing in India:

Reduction of custom duty on mobile components (such as camera lens and its parts) from 2.5% to nil and on open cell for TV from 5% to 2.5%

Thus, reduction in import duty of components is aimed at promoting value added manufacturing of finished products such as mobile phones and TV with further emphasis on increasing export in this domain.

Key measures for auto sector:

• Government has proposed exempting custom duty on plant & machinery imports needed for manufacturing Li-On cells for electric vehicle batteries. This is beneficial for companies executing capex in this field
• Government also proposed to increase custom duty on vehicles being imported as semi knocked down (SKD) & completely built unit (CKU) including EVs to promote premium vehicle manufacturing domestically
• Custom duty on bicycles is also proposed to be increased

Source: Indiabudget.nic.in, ICICI Direct Research, Budget documents, Ministry of Commerce