Fiscal deficit an important variable to track in Budget 2023, say mutual fund managers

The Union Budget 2023 is just around the corner and many experts are talking about their expectations. Mutual funds have also laid down some important proposals in front of the finance ministry. However, mutual fund managers say that like the previous years, the chances of big reforms being announced for mutual funds specifically are low. These managers say that one thing that will be an important factor to look out for in this Budget would be the fiscal deficit.

“The union budget lays out the income statement of the central government which shows the government’s revenue and expenditure. Over the years the occasion has been used by the government to change the tax structure and lay out the fiscal policies of the government. Though we have seen that major reforms and/or policies have been announced outside of the budget in the recent past, from a bond market perspective, the fiscal deficit or the borrowings of the central government are important variables to track in the budget and as such we think that the fiscal deficit can be in the vicinity of 6% for FY24 as compared to 6.40% in FY23,” says Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.

According to fund managers, the government will most likely meet its fiscal deficit aim of 6.4% of GDP in FY23 aided by robust tax revenue growth and higher than budgeted growth in nominal GDP. The CSO, in its first advance estimates, has pegged the nominal GDP at Rs. 273 trillion as against the budget estimate of Rs. 258 trillion. Additionally, the government is likely to collect over Rs 3 trillion of excess taxes over and above the budget estimates. Managers believe that this should offset the excess spending on food and fertilizer subsides and shortfall in disinvestment proceeds in the current financial year.

“Slowing global growth, sluggish domestic economic recovery and political considerations ahead of 2024 Union election might influence budget math in FY24. However, we expect the government to remain on fiscal consolidation path and further reduce the fiscal deficit target to around 5.8% of GDP in FY24. They might keep some room to increase spending if economic growth deteriorates. From the bond market’s perspective, the main focus will be on the quantum and maturity profile of the government’s market borrowings. At 5.8% fiscal deficit, net and gross market borrowing would be around Rs. 12 trillion and Rs. 16.4 trillion respectively,” says Pankaj Pathak, fund manager-Fixed income, Quantum Mutual Fund.
Fund managers believe that the increased demand from Insurance and pension funds might continue to support the ultra-long segment (10 year plus maturities) of the bond market. However, tightening liquidity condition and elevated credit growth might reduce the banks’ demand for bonds next year.