Budget 2022: Fiscal Deficit Seen At 6-6.3% For FY23

Economists expect the government to meet its FY22 fiscal goal and target consolidation of about 0.5 ppt in FY23.

<div class="paragraphs"><p>Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)</p></div>
Indian five hundred rupee banknotes are arranged for a photograph in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

The central government will target modest fiscal consolidation in FY23 as it tries to balance the need to support the economy while narrowing the budget gap.

The fiscal deficit for FY22 is expected to settle close to the budget estimate of 6.8%, according to economists and analysts. For FY23, the government may target a fiscal deficit between 6% and 6.3%.

"The government’s fiscal policy since the pandemic began has prioritised growth and fiscal transparency over fiscal consolidation, in the hope that robust medium-term growth prospects will help with debt sustainability," said Sonal Varma and Aurodeep Nandi, economists at Nomura. This theme will likely persist into FY23.

We believe the government will adopt a strategy of ‘directional’ fiscal consolidation in FY23 i.e., ensuring the fiscal deficit continues to moderate, while continuing to support growth.
Sonal Varma & Aurodeep Nandi, Nomura

Higher-than-expected tax collections are likely to help the government in reducing its budget gap in the coming year.

"Higher nominal GDP will imply that gross revenue will increase to Rs 26.5 lakh crore in FY23 from Rs 22.2 lakh crore as per FY22 budget estimate," said Madan Sabnavis, chief economist at Bank of Baroda. Sabnavis expects the budget estimate for FY22 tax collection to be revised upwards by Rs 1 lakh crore because of stronger nominal GDP growth seen this year.

"Gross tax revenue to GDP ratio is expected to remain broadly unchanged in FY23 (10.1%) compared with FY22 (10%)," Sabnavis said.

QuantEco Research expects growth of 8.6% in gross tax revenue in FY23 and estimates collections at Rs 28.1 lakh crore.

Non-tax revenues, which includes divestment, will see mixed trends in the new financial year. Planned divestments, such as that of Life Insurance Corp., could be completed next year and added to non-tax revenue. On the flip side, dividend from the Reserve Bank of India could be lower than in FY22.

"For FY22, the scenario shows that an upside surprise in tax revenue is likely to more than offset weak disinvestment receipts and higher-than-budgeted current expenditure, while maintaining strong capex," said Pranjul Bhandari, chief India economist at HSBC.

For FY23, tax buoyancy may not be as strong—and may even decline in the case of excise duties (where taxes have been cut). The hope is that privatisation receipts rise and cover that slack.
Pranjul Bhandari, Chief India Economist, HSBC

On the expenditure side, as crisis level subsidies fall, that space can be split between higher capex, a well-funded NREGA programme, and fiscal consolidation, said Bhandari.

According to Nomura, the focus of expenditure will remain on capex. "We expect a strong 25% increase in capital expenditure, with a focus on infrastructure," Varma and Nandi wrote.

Alongside, there is a need to consider policies that provide income support, wrote DK Joshi, chief economist at Crisil. "Policy support focus on incomes must continue for longer, till growth becomes broad-based and demand conditions show sustained improvement," Joshi wrote.

This, he said, can take the form of increased allocation for MGNREGA. There is also a case for introducing an urban jobs guarantee programme, Joshi added.

There is merit in introducing similar employment generation schemes in urban areas, given how swathes of workers such as in urban construction and contact-based services remain un/underemployed, even if lockdowns have become less restrictive.
DK Joshi, Chief Economist, CRISIL

Government Borrowings

Despite a reduction in the fiscal deficit, government borrowings will remain high.

Gross borrowings are seen in the range of Rs 12-14 lakh crore, with net borrowings likely to be closer to Rs 9-10 lakh crore.

"For FY23, we expect 61% of the fiscal deficit to be funded via market dated government securities of close to Rs 9.1 lakh crore and another Rs 45,000 crore through treasury bills," said Aastha Gudwani, India economist at BofA Securities. "Atop this net borrowing, there is Rs 3.76 lakh crore worth of maturities in FY23. All in, we see total gross borrowing of Rs 13 lakh crore in FY23."

While the anticipated net borrowing of 3.4% of GDP in FY23 is lower than the average of last two Covid years at 4.3%, it remains substantially higher in comparison to the 2.2-2.6% range seen in the previous four-years prior to the pandemic, said QuantEco Research.

This, together with more limited support from the central bank, could push up bond yields.

Nomura shares that view. "Given the relatively high level of supply for next year, the lack of RBI buying and our expectation of hikes by the RBI this year, we think yields will continue to drift higher," it said.