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Govt to trim fiscal deficit in FY24, follow glide path

“We are likely to close 2022-23 with a fiscal deficit very much around the budgeted level as a percentage of GDP (6.4%), even though expenditures will rise,” the official added.

Govt to trim fiscal deficit in FY24, follow glide path
The FY23 budget estimate (BE) was `2.06 trillion for food subsidy, `1.05 trillion for fertilisers and `5,812 crore for petroleum. (File/Getty Images)

The Centre will trim its fiscal deficit meaningfully in 2023-24 by using a portion of the fiscal space available in the year, including savings of `1 trillion from the discontinuation of the free grains scheme and lower subsidies on fertilisers and cooking gas due to a moderation seen in global commodity prices, a senior official told FE.

It will use some of the space available from savings on subsidies to keep capital expenditure at a robust level, though a sharp increase in the overall expenditure is unlikely, the official added.

“We have to see how much capex can be increased in 2023-24 as there is a fiscal deficit reduction path outlined by the finance minister,” the official said. According to the glide path, the Centre has to bring down the fiscal deficit to 4.5% of GDP by 2025-26.

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“We are likely to close 2022-23 with a fiscal deficit very much around the budgeted level as a percentage of GDP (6.4%), even though expenditures will rise,” the official added.

Of course, the Centre is unlikely to be ultra-aggressive in fiscal tightening in 2023-24 to avoid any negative impact on growth. It will seek to contain its already-elevated gross market borrowing in the next fiscal at a lower level of GDP than in 2022-23, as it intends to mitigate its elevated debt as well as interest burden.

The Centre will likely spend an additional `2.8 trillion on major subsidies compared with `3.18 trillion budgeted for 2022-23, including about `1.24 trillion on the free grains scheme, `1.3 trillion on fertiliser subsidy and `22,000 crore on cooking gas subsidy. The FY23 budget estimate (BE) was `2.06 trillion for food subsidy, `1.05 trillion for fertilisers and `5,812 crore for petroleum.

The Russia-Ukraine war has led to a spike in fertiliser and fuel subsidies as global prices of the relevant commodities remained elevated. Imported fertiliser costs almost doubled in less than a year. Despite the lowering of the distress level among masses after the pandemic, the government extended the free grains scheme for the first nine months of the current fiscal.

According to an FE analysis, the net (post-devolution) tax revenue for the Centre could be around `2.5 trillion higher than the BE of `19.3 trillion. This would provide comfort to fund additional expenditure on subsidies even though non-tax revenues may see a shortfall of about `50,000 crore in 2022-23. Savings of about `70,000-80,000 crore from the existing budget heads will help keep the deficit at the targeted level for 2022-23. Higher nominal GDP growth due to elevated inflation than budgeted will also help.

“Hopefully, if prices come down, there will be some relief on some of the subsidies next year, especially fertilisers and petroleum,” the official said, adding that discontinuation of the free grains scheme will yield a substantial reduction in food subsidies.

“We anticipate that a moderate fiscal correction would be attempted next year, with a fiscal deficit in the range of 5.5-6%, depending on factors such as the market-driven level of fertiliser subsidy and whether free food grains are provided in the coming fiscal,” rating agency Icra’s chief economist Aditi Nayar said.

The Centre is unlikely to raise its Budget size substantially for the next fiscal, upon the bloated revised estimate (RE) for FY23. The budget spending may rise by around `2 trillion to `41.4 trillion in the 2022-23RE over the BE.

However, given its sustained focus on productive spending to spur economic growth, the budgetary capex could still witness a decent expansion.

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However, the pace of rise in capex in 2023-24 will be lower than the budgeted 27% for this fiscal to `7.5 trillion (including `1 trillion in long-term, interest-free loans to states for capex) due to the already high base and the limited capacity of departments to scale up such spending substantially year after year. But the tightening of growth in revenue expenditure will likely continue in 2023-24, despite elections in 2024.

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First published on: 16-11-2022 at 05:45 IST