The higher-than-estimated nominal GDP growth fuelled by higher inflation in 2022-23 is likely to help the Centre keep its fiscal deficit well within the projected level of 6.4% of the GDP, and also give it space to bring it to below 6% in 2023-24, analysts said.
The first advance estimate of national income for 2022-23 has pegged real GDP growth at 7% and nominal GDP growth at 15.4%. The projection of nominal GDP growth in the Budget was 11.1% for 2022-23.
According to DK Srivastava, chief policy advisor, EY India, the fiscal deficit for FY23 will be kept within 6.4% and it is likely to be at about 5.7% in 2023-24. “The Centre would be able to maintain the 6.4% number provided there is no additional supplementary demand (for spending) later in the year,” he said, adding that higher tax collections as well as the higher nominal growth will help the government to stick to the target. Net cash outgo of Rs 3.25 trillion was envisaged in the first supplementary demand for grants — presented in Parliament on December 2022.
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The GDP deflator is seen at about 7.9% this fiscal and wholesale price based inflation, which has a higher weight in the deflator, will drive the deflator based inflation downwards next year. The RBI has pegged CPI inflation at 6.7% in 2022-23 with real GDP growth at 6.8%.
Srivastava expects nominal GDP growth at a little less than 11% in 2023-24 with the GDP based deflator at about 4.5% and real GDP growth at 6%. “The challenge would be to lower the fiscal deficit while supporting growth and maintaining government capital expenditure. Net exports will continue to contribute negatively to GDP growth. The government will have to mobile non tax revenue and accelerate disinvestment to support expenditure next fiscal,” he said.
“The good news for the government as it prepares the Union Budget 2023-24 is that it does not have to stare at a higher than targeted fiscal deficit. This is because of the higher nominal GDP and in turn the tax revenues will help it meet any shortfall in revenue and higher expenditure,” said Sunil Sinha, principal economist, India Ratings. He however, does not expect the Centre to go for an abrupt reduction in the fiscal deficit in 2023-24 and expects it will be similar in quantum to the reduction from 6.9% in FY22 to 6.4% in FY23.
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Crisil said the upward revision in nominal GDP has given the government scope to increase fiscal deficit, while maintaining its proportion to GDP at budget target. Given the latest update on nominal GDP, the government can increase fiscal deficit by Rs 97,080 crore, while sticking to the deficit target and will help accommodate additional capital expenditure and subsidies incurred this year.
The higher inflation, along with pent up demand, is also expected to give a boost to private final consumption expenditure which is estimated to increase by 16% in FY23 y-o-y, noted Madan Sabnavis, chief economist, Bank of Baroda. The growth in gross fixed capital formation is also likely to be higher at 29.2% this fiscal. “On the whole these numbers are good for the government when formulating the Budget,” he said.
India Ratings, however, believes that the growth in private final consumption expenditure is still short of a broad-based recovery. “The current consumption demand is highly skewed in favour of goods and services consumed largely by the households falling in the upper income bracket,” Sinha said, adding that the growth in gross fixed capital formation reflects the sustained focus of government on capex.
The share of PFCE is expected to rise to 57.2% in the GDP in FY23 from 56.9% last fiscal while the share of GFCF is seen at 33.9% this fiscal from 32.5% last fiscal. Per capita gross national income at constant prices is seen to have grown by 5.5% to Rs 0.113 million in FY23 from Rs 0.107 million in FY 22, registering a slower than the 7.4% y-o-y in FY22.