Despite the challenging circumstances in the last couple of years, the government has managed its finances reasonably well. The fiscal deficit for FY22 is likely to be reined in at 6.8-6.9% of GDP despite a huge shortfall in non-tax revenues. While the revenue collections have been exceptionally strong, it is the prudent expenditure management that has saved the day. The government provided little fiscal stimulus, arguing that money in the hands of individuals, either via direct transfers or via tax cuts, would not encourage spending and would instead result in more savings. It even clamped down on expenditure in the early part of the year, and it is possible that some of the capex outlay of Rs 6.02 trillion could remain unutilised.
With global growth and trade slowing, crude oil prices remaining elevated, and the US Fed tightening, the macro-environment in the fiscal year beginning today could prove lot more challenging. While the revenue projections for FY23 appeared realistic in February when the Budget was presented, the oil shock and the consequent rising inflation could throw the math off kilter. Although the corporate sector is doing well, the targeted growth for direct tax revenues at 14% now seems a tad optimistic. Moreover, the 16% growth forecast in GST revenues appears a tall ask, coming on the back of a fairly strong base in FY22, which is tipped to see a growth of 25%-plus.
The fact is that private final consumption expenditure (PFCE) has been weak for some time now. It grew just 7% y-o-y in the third quarter of FY22 on a very weak base of 0.6% y-o-y in the corresponding period of the previous year, despite it being the festive and wedding season. To be sure, the demand for services is expected to perk up now that the pandemic-related curbs have been relaxed across the country. Nonetheless, should companies continue to pass on the higher costs of inputs to consumers via price increases, demand could slow down. As such, the government must focus on disinvestment and privatisation programmes where the performance so far has been disappointing.
In FY22, for instance, the total proceeds until February-end were just Rs 13,531 crore compared with the original target of Rs 1.75 trillion and the revised target of Rs 78,000 crore. The target for FY23 of Rs 65,000 crore is a modest one and will be exceeded thanks to the LIC IPO, which alone is tipped to fetch Rs 65,000 crore. However, a more determined effort is called for, both on stake sales in PSUs and the outright sales of businesses. The sale of BPCL, for instance, has taken far too much time.
Should revenues in FY23 fall short of budgeted expectations, the government would be severely restricted in its capability to spend. The capex outlay for the current year at Rs 7.5 lakh crore, while a jump of 24%, may be curtailed if the government needs extra resources in other areas such as fertiliser subsidies. At a time when private sector capex is modest, any cutbacks by the government would put a question mark on the nominal GDP growth projection of 11.1%. Ideally, the government should step in to trim excise duties on auto fuels, especially diesel, to soften the blow on consumers, but the pressure on the fisc is already severe; market borrowings in FY23 will be a very high Rs 12.05 trillion. The way out is to speed up reforms so that the private sector is incentivised to invest.
From land reforms to easier labour laws and fewer clearances and approvals, the Centre and states must make it easier for companies to do business. In particular, there must be regulatory certainty. Else, it will be difficult to resolve the unemployment problem, and the economy will slip back into a trough.