Bigger Nominal GDP Size Compresses Deficit: Higher revenues moderate FY22 fiscal deficit to 6.71%

Analysts see deficit around 6.4% target for FY23, thanks to likely upsides in revenues and nominal GDP

The gross domestic product (GDP) had expanded by 2.5 per cent in the corresponding January-March period of 2020-21, according to data released by the National Statistical Office (NSO).
India’s nominal GDP as per provisional estimate was 1.9% higher than the first advance estimate, used in preparation of FY23 budget. This helped moderate fiscal deficit for the year.

With its net tax and non-tax revenue being 4.3% higher than the revised estimate (RE) presented in February, the Centre managed to narrow its fiscal deficit moderately to 6.71% of the GDP in FY22, against RE of 6.9%. Apart from extra receipts, a higher nominal GDP size also helped compress the fiscal deficit despite total expenditure exceeding RE on account of higher fertiliser subsidies and other revenue expenditures.

While a fiscal deficit of 6.4% is estimated by the Centre for FY23, some analysts expect it to rise marginally to 6.5% despite additional spending liability of about Rs 2 trillion on subsidies and Rs 1-trillion revenue loss due to cut in excise duty on auto fuels and the customs duty reduction on select raw materials for steel and plastics. A large part of this additional spendings, however, would be offset by tax revenues which will be higher than budgeted level.

Analysts estimate the Centre’s net tax revenues to be Rs 1-1.3 trillion more than FY23BE while disinvestment receipts are also expected to exceed target by Rs 20,000 crore in the current fiscal.

According to Controller General of Accounts, fiscal deficit came in at Rs 15.865 trillion marginally lower than the FY22RE of Rs 15.911 trillion. India’s nominal GDP as per provisional estimate was 1.9% higher than the first advance estimate, used in preparation of FY23 budget. This helped moderate fiscal deficit for the year.

While revenue expenditure was at Rs 32 trillion or 1.1% higher than FY22RE, capex was at Rs 5.93 trillion or 1.5% lower than revised target. Total expenditure came in at Rs 37.94 trillion for FY22, 0.6% higher than RE.

Provisional tax and non-tax revenue were 3.13% and 10.92% higher than FY22RE. However, due to lackluster performance of disinvestment at Rs 13,631 crore as against Rs 78,000 crore penned in FY22RE, total receipts were only 1.32% higher than FY22RE.

“Clearly inflation-driven nominal GDP growth has led to higher tax collections and resulted in marginally better fiscal performance than FY22RE,” said India Ratings economists Sunil Kumar Sinha and Paras Jasrai.

There are several risks to the fiscal deficit target of Rs 16.6 trillion (6.4% of GDP) for FY2023, emanating from the revenue loss to the Centre on account of the excise duty cut, lower-than-budgeted transfer of the RBI’s surplus, and the need for additional spending on food, fertiliser and LPG subsidies through the year.

“However, a large part of this would be offset by appreciably higher than budgeted taxes, limiting the extent of the overshoot in the government’s fiscal deficit in FY23 to Rs 1 trillion above the BE, even if there are no expenditure savings,” said Icra chief economist Aditi Nayar.

The Centre has indicated that it may trim revenue expenditure a bit from the BE level in FY23 to accommodate part of extra spending on subsidies. Moreover, a higher nominal GDP vis-à-vis the BE is likely to contain the expected fiscal deficit at 6.5% of GDP, only slightly exceeding the budgeted 6.4% of GDP, Nayar said.

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