Budget 2023: How debt mutual funds can be crucial for govt’s fiscal deficit target of FY23-24

Union Budget 2023: Union Finance Minister Nirmala Sitharaman said that the fiscal deficit for the next fiscal, FY2023-24, will be 5.9 per cent. The finance minister said that the Revised Estimate (RE) of the fiscal deficit for this fiscal is 6.4 per cent of GDP, adhering to the Budget Estimate (BE). 

“The fiscal deficit is estimated to be 5.9 per cent of GDP. In my Budget Speech for 2021-22, I had announced that we plan to continue the path of fiscal consolidation, reaching a fiscal deficit below 4.5 per cent by 2025-26 with a fairly steady decline over the period. We have adhered to this path, and I reiterate my intention to bring the fiscal deficit below 4.5 per cent of GDP by 2025-26,” said the Finance Minister. 

As per the government’s roadmap, to finance the fiscal deficit in the next fiscal 2023-24, the government will earn Rs 11.8 lakh crore from the net market borrowings from dated securities. The rest is expected to come from small savings and other sources, which is roughly a little over Rs 3.5 lakh crore. This is higher than the total borrowing of Rs 14.21 lakh crore for the current financial year ending March 31, 2023. 

“The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 15.4 lakh crore,” she said in her Budget statement. 

Experts and fund managers feel that the fiscal deficit numbers for next fiscal and the government borrowing is an opportunity for the bond market and the debt mutual funds. 

“With a clear focus on capex-led growth (~33%) and maintaining fiscal prudence, the borrowing numbers are likely to be controlled and may not exceed the borrowing plans. Additionally, the direct income growth is considered to be very moderate and it may exceed its own target. All combined together, it will allay concerns of upward pressure on bond yields which will help debt mutual funds to generate stable numbers without much volatility. We may be near the terminal rate except for the 25-50 bps hike which is also priced in. Hence, the debt mutual fund returns would be stable and in line with the targeted yield-to-maturity in passively managed funds,” said Amar Ranu, Head, Investment products and Advisory, Anand Rathi Shares & Stock Brokers. 

“The lower fiscal deficit estimates at 5.9 per cent will help the market gain more confidence in the continuing fiscal prudence. This will allay concerns of significant upwards pressure on bond yields. The focus will shift back toward RBI monetary policy. Overall a positive sign for the bond markets and debt mutual fund investors,” said Kaustubh Belapurkar, Director, Manager Research, Morningstar India.  

The indebtedness of the Centre and State governments together is equal to 83 per cent of the annual gross domestic product (GDP). 

The Finance Minister retained the fiscal deficit target at 6.4 per cent despite an increase in the subsidy bill. 

“Coming to 2023-24, the total receipts other than borrowings and the total expenditure are estimated at Rs 27.2 lakh crore and Rs 45 lakh crore, respectively. The net tax receipts are estimated at Rs 23.3 lakh crore,” Sitharaman said.