The government will likely refrain from hiking its budgetary expenditure sharply in FY23 upon the revised estimate (RE) for this fiscal, as it’s wary of the potential cost of delaying fiscal rectitude for long after being forced to go on a spending spree in recent years, sources told FE.
Given the high base, any hike in budgetary spending may not be more than to 5-10% in FY23 upon the RE for this fiscal (the Budget size may thus remain under Rs 40 lakh crore), although nominal GDP is expected to grow by about 12.5%, a source indicated.
Nevertheless, the Centre would focus more on the quality of expenditure by continuing with its pledge to bolster budgetary capex. It will rein in revenue spending, wherever possible, without curtailing allocations for critical areas such as health and education, one of the sources said.
It may also cut allocation for certain centrally-sponsored schemes where the outcome doesn’t match with the outlay.
Even before the Covid outbreak, the government had to raise budgetary expenditure by as much as 16.5% on year in FY20 to Rs 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 Rs 35.1 lakh crore to protect lives and livelihood, despite an acute revenue shortfall. The pace of spending, thus, remained way above the nominal GDP growth of just 7.8% in FY20 and -3% in FY21. Of course, there hasn’t really been a strict co-relation between the pace of GDP expansion and the rise in the Budget size – the latter is driven more by immediate exigencies.
While the government has targeted a marginal expenditure cut in FY22, it could end up exceeding the Budget estimate by about Rs 2.4 lakh crore to Rs 37.2 lakh crore, up almost 7% from the last fiscal, driven particularly by inflated food and fertiliser subsidy, according to an Icra estimate.
Given that the Centre’s debt burden is expected to scale a 16-year peak of almost 62% of GDP at the end of this fiscal (the general government debt hovers around 90%) from less than 49% in FY20, raising expenditure sharply in FY23 on a high base would be counter-productive, one of the sources said.
The spurt in global commodity prices, elevated inflation and the spectre of a faster tapering by the US Federal Reserve may force the Reserve Bank of India to start tightening the interest rate early next fiscal, tracking its counterparts in the advanced economies. Against such a backdrop, the fiscal policy must not run counter to the monetary policy, said another source, indicating that the current spending spree can’t go on despite Covid compulsions.
Similarly, if the Centre were to realise the stated goal of pruning fiscal deficit to 4.5% by FY26 from 6.8% in FY22, it will have no option but to resort to solid consolidation in FY23, analysts said. This is partly because general elections in 2024 could potentially slow down the pace of reduction in the deficit ratio in FY24.
As for this fiscal, the net tax revenue is expected to cross the Budget estimate by about Rs 2-2.5 lakh crore. But a likely shortfall in disinvestment proceeds and additional expenditure commitments would offset this gain and prevent the Centre from trimming fiscal deficit sharply in FY22 itself from the budgetted 6.8%, analysts said.
Firming up its forecast for FY23, Icra has said the Centre’s fiscal deficit could drop to 5.8% of GDP in the base case scenario where the impact of the current Covid wave is limited to the March quarter and no further wave in the next fiscal. However, in the adverse scenario (moderate Covid wave in FY23), the deficit may go up to 6.9% next fiscal, it has cautioned.
In the base case scenario, the planned ceasing of GST compensation by the Centre could cause state governments’ fiscal deficit to rise to the cap of 3.5% of their GDP, as set by the Fifteenth Finance Commission. Accordingly, the general government deficit would come in at about 9.3% of GDP in FY23, according to Icra.