Government should focus on fiscal consolidation in Budget 2023: Abheek Barua

"Most of the slowdown will come from weakening external demand and this is likely to take it down to about as I said a ballpark of around 6%," says Abheek Barua, HDFC Bank.

Your first take as far as the initial estimates are concerned 11% nominal growth for FY24, for real GDP they have a baseline of around 6.5% do you expect this to be realistic?
Well more or less so. But I think I would tend to go with a slightly lower GDP number maybe around in the range of 5.8% to 6%. I think there is considerable resilience in the economy and that said I mean there is a global slowdown which is very much entrenched now and I think that will sort of affect India's growth prospects.

Most of the slowdown will come from weakening external demand and this is likely to take it down to about as I said a ballpark of around 6%. So maybe this is a tad overstated. I think the 11% nominal GDP number is important. It is realistic given the fact that inflation is coming down and with moderation in commodity prices that the GDP deflator is kind of biased towards wholesale prices and there should be considerable moderation from about the 15.5% nominal GDP growth number that we have seen this time which has its own problems.

Tax collections are partly dependent on the nominal GDP number, it comes into the denominator. So that is a matter of concern and that is something I would focus on in looking at the budget numbers tomorrow. But that said I mean I would not sort of take away all the credit from the government and attribute it to inflation. If we indeed come up with the 6.4 or a lower number for the fiscal deficit it would also involve an improvement in tax collections and the efficiency of tax collections. So if you are looking at things like the relationship between incremental GDP and tax revenue collections broadly referred towards the elasticity then I think that there has been a considerable improvement there. So it is just not inflation and the nominal GDP alone but expenditure overrun some of which was inevitable.

I think we should get a 6.4% number as next year is going to be a little challenging. But I think the government despite concerns about the elections and the possible tilt towards populism is a physically conservative government and I think there has been a conscious effort to shift the narrative away from freebies or revdis as the Prime Minister has called it. So I think there would be a genuine effort towards consolidation.

Let me just ask a question that has been troubling me for a while now, which is simply that so far we keep talking about growth being driven by consumption. But ideally, any sustainable growth should be driven not by consumption but ultimately by investment. And that is something that we have not seen happen so far. Government too its credit has reoriented its expenditure towards capex but we have not seen the private investment come in as yet so what is really holding back private investment to your mind?
Well I think the pandemic caused a lot of anxiety among private companies and they sort of held back on capital expansion plans. But I think there is a sort of a nascent private capex cycle which is underway, despite the risks and the threat of global slowdown if not recession. Companies are getting a little more confident about long term prospects, they are facing capacity constraints. If you look at capacity utilisation numbers, for instance the RBI's OBICUS Survey which does sort of an average capacity utilisation for industry, that has gone up quite considerably.
Now, I mean it is not across the board but in a number of sectors, companies are looking at both better domestic prospects as well as once the global crisis is over they are going to sort of look through it and where there are significant export prospects they might just add capacity.

So I think this is going to be critical and the thing that the government can do with the budget is that yes they should re-prioritise expenditures but I think the focus should be very clearly on fiscal consolidation because ultimately private investments are influenced by interest rates.