The Union government will likely adopt a middle path by resisting calls for either a massive fiscal consolidation or a decent expansion in the Budget for FY23. It may aim for a fiscal deficit of 5.8-6.3% of gross domestic product (GDP) for FY23, against 6.8% for the current fiscal, informed sources reckon.
While any hasty return to fiscal austerity can potentially jeopardise the fragile economic growth story that clearly needs more support amid fresh risks from the new Covid strain, an expansionary Budget will potentially add to the already-elevated inflationary pressure, upset the bond yield curve and further inflate the stock of public debt. This is the biggest dilemma for the government, as it braces to present the Budget on February 1, the sources believe.
Though real GDP is estimated to grow 9.2% in FY22 from a year before, it is expected to rise only 1.3% from the pre-Covid (FY20) level. Meanwhile, retail inflation scaled a six-month peak of 5.59% in December and wholesale price inflation eased only slightly from a 30-year high to 13.56% last month, albeit on an unfavourable base. The Centre’s debt rose to 55% of GDP in 2020 from 46% in the previous year, while general government debt swelled to 90% from 74%, showed the International Monetary Fund data, as authorities stepped up spending to soften the Covid blow.
On top of this, if the central bank is forced to hike the interest rate early next fiscal to curb inflation and address fears of potential flight of capital in the wake of tightening measures by the US Federal Reserve, an expansionary fiscal policy will run counter to the monetary policy, in a replay of the UPA’s policy intervention (often criticised by senior functionaries of this government) in the aftermath of the global financial crisis that ultimately bridled growth momentum.
Nevertheless, given that the government intends to set right its medium-term fiscal glide path by achieving robust economic expansion, it can ill-afford to slam the brakes on growth-inducing measures and allow debt sustainability to exacerbate. So, while it is unlikely to go on a spending spree in FY23, it will well target its expenditure, according to the economists. Capital expenditure, therefore, will likely be scaled up substantially in FY23 (some expect it to be as much as `6.5 lakh crore against the FY22 budget estimate of `5.5 lakh crore). Revenue spending, however, could be tightened and such expenditure where the outlay doesn’t match with the outcome could be axed.
While the government has targeted a marginal expenditure cut in FY22, it could end up exceeding the Budget estimate by about `2.4 lakh crore to `37.2 lakh crore, up almost 7% from the last fiscal, driven particularly by inflated food and fertiliser subsidy, according to an Icra estimate.
Even before the Covid outbreak, the government had to raise budgetary expenditure by as much as 16.5% on year in FY20 to `26.9 lakh crore to prop up faltering growth. Then the pandemic struck, forcing it to step up expenditure by a sharp 30.5% to `35.1 lakh crore to protect lives and livelihood, despite an acute revenue shortfall.
Given the high base, analysts expect the rise in FY23 budgetary expenditure to remain under 10% upon the revised estimate for this fiscal.
