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Published: Jan 20, 2023
Updated: Jan 20, 2023

Morgan Stanley Predicts Bright Outlook for India's Fiscal Deficit with Focus on Infrastructure and Rural Spending

Fiscal deficit expected to narrow

According to a recent report by American financial management company Morgan Stanley, India's fiscal deficit is expected to narrow to 5.9 percent of GDP in FY2024 from 6.4 percent in FY2023. This improvement is largely driven by a decrease in subsidy spending, which will allow for a sustained focus on public capital expenditure (CapEx) spending and support overall economic growth.

Moderating Subsidies Pave the Way for Fiscal Consolidation

The report predicts that subsidy spending will decline to 1.3 percent of GDP in FY24 from 2 percent of GDP in FY2023. This decrease is attributed to lower food and fertilizer subsidies. Specifically, food subsidies are expected to decrease to 0.8 per cent of GDP from 1.1 per cent in FY23 as the government discontinues expanded free food grain distribution. Additionally, fertilizer subsidies are expected to decrease to 0.5 per cent of GDP in FY24 from 0.8 per cent in FY23, due to a decline in fertilizer prices by 30-33 per cent YoY.

Infrastructure and Rural Investments to Drive Capital Spending Growth

Capital spending is expected to increase by 16 per cent YoY, keeping CapEx to GDP at 2.9 percent of GDP in FY24, slightly higher than 2.8 percent of GDP in FY23. This shift in spending mix will see capital spending accounting for 19.8 percent of total expenditure compared to an average of 13.2 per cent in the previous five years. The report predicts that allocation for infrastructure sectors such as railways and roads will improve, with a continued focus on infrastructure investments in rural areas.

Positive Outlook Ahead

Overall, Morgan Stanley's report indicates a positive outlook for India's fiscal deficit, as decreasing subsidies and increased focus on infrastructure and rural spending are expected to drive economic growth. This is good news for industries that are related to infrastructure such as paints and colours. The report's emphasis on rural spending is also an indication of the government's focus on rural development and investment opportunities in rural areas.