The Centre has been handed a fiscal room of 35 basis points, with nominal GDP growth for the year expected to exceed the Budget 2022-23 estimate by a substantial margin.
According to the data released by the statistics ministry on January 6, India's nominal GDP is estimated to grow by 15.4 percent this year. This is 430 basis points higher than the estimate of 11.1 percent made by the finance ministry in the Budget presented last year.
One basis point is a hundredth of a percentage point.
The fiscal deficit math
The Centre is targeting a fiscal deficit of Rs 16.61 lakh crore this year. This amounts to around 6.44 percent of GDP, with the Budget having assumed a nominal GDP of Rs 258 lakh crore for 2022-23.
However, the statistics ministry's first advance estimate has pegged this fiscal's nominal GDP at a significantly higher Rs 273 lakh crore.
"With the moderate growth in tax revenues and rise in expenditures, it was expected that the fiscal deficit will shoot up marginally," noted Soumya Kanti Ghosh, State Bank of India's group chief economic adviser.
"However, taking into account the revised GDP figures…if tax receipts grew by the Budget estimate, then the government has space of around Rs 85,939 crore without changing the fiscal deficit target of 6.4 percent of the GDP in FY23," Ghosh added.
If the government sticks to its fiscal deficit target of Rs 16.61 lakh crore, then, as a percentage of the first advance estimate of the GDP, the deficit will be 6.08 percent – around 35 basis points lower than the government's stated target.
As per the latest data, the Centre had exhausted 59 percent of the full-year fiscal deficit target – or Rs 9.78 lakh crore – in the first eight months of 2022-23.
Higher expenditure
The Budget for 2023-24, set to be presented in Parliament on February 1 by Finance Minister Nirmala Sitharaman, is unlikely to see the revised estimate for this year's fiscal deficit lowered to 6.1 percent. In the Winter session of Parliament, the Centre sought to spend a net Rs 3.26 lakh crore more as part of its first supplementary demands for grants for 2022-23.
However, Sitharaman has said tax collections are buoyant enough to help meet the extra expenditure.
"The upward revision in nominal GDP has given the government scope to increase fiscal deficit while maintaining its proportion to GDP at Budget target," noted rating agency CRISIL in a report last week.
"This will help accommodate additional capital expenditure and subsidies incurred this year. Both fertiliser and food subsidy allocations were revised up significantly soon after the Budget announcement," CRISIL added.
According to CRISIL's estimates, the government can increase its fiscal deficit by Rs 97,080 crore and still achieve a fiscal deficit of 6.4 percent of GDP.
The government's decision to assume a nominal GDP growth of 11.1 percent for 2022-23 had raised eyebrows as it was widely seen as highly conservative. Only in one instance in the last 10 years – in 2016-17 – had a Budget assumed such a low nominal GDP growth rate. And in that year, the actual nominal GDP growth rate ended up 10 basis points higher than the Budget assumption of 11 percent.
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