Questions over govt's budget estimates as Q1 nominal GDP growth hits 9-quarter low

Deflator-inflation link

The difference in real and nominal growth is called the GDP deflator, which is a combination of wholesale and retail inflation, with the former accounting for a larger share. As inflation fell rapidly in April-June, it is natural that the GDP deflator, too, declined sharply.

Wholesale Price Index (WPI) inflation averaged -2.8 percent in April-June 2023 as against 3.4 percent in January-March and 16.1 percent in April-June 2022. Meanwhile, Consumer Price Index (CPI) inflation averaged 4.6 percent in April-June 2023, down from 6.2 percent in January-March and 7.3 percent in April-June 2022.

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Admittedly, wholesale inflation is set to increase – and it already has, rising to -1.36 percent in July, from 4.12 percent in June – while CPI inflation has already shot up to a 15-month high of 7.44 percent. As such, this should push up the GDP deflator in the final three quarters of 2023-24. However, economists are not convinced it will rise enough for nominal GDP growth to reach what was assumed by the government in the budget presented on February 1.

"Indeed, for the full year, we see 2023-24 nominal GDP growth tracking at 9 percent or lower," said Gaura Sen Gupta, India economist at IDFC First Bank, in a note on August 31.

Sen Gupta is not alone in expecting sub-10 percent nominal growth this year.

"Due to better-than-expected growth in April-June, we will soon revise up our 2023-24 real GDP growth forecast from 5.6 percent forecasted in June, though nominal GDP growth may remain in single digits, as expected," Nikhil Gupta, chief economist at Motilal Oswal Financial Services, noted.

In late March, Gupta had said that nominal GDP growth in 2023-24 could be as low as 7.7 percent.

Why nominal growth matters

The nominal GDP growth assumed by the finance ministry in the budget is one of the most crucial numbers as it determines estimates such as the fiscal deficit and growth in tax collections. If the actual nominal GDP growth exceeds what was assumed, it can provide greater room to meet the fiscal deficit target, expressed as a percentage of GDP.

Similarly, lower nominal growth can make meeting the fiscal deficit target more difficult and can lead to weaker-than-projected growth in tax collections.

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The 2023-24 budget assumed a 10.4 percent growth in gross tax revenues.

To be sure, the government has already pushed back on any suggestion of nominal growth missing the budget assumption.

"The Economic Survey assumed a number of 11 percent. For budgeting purposes, the government was conservative to take 10.5 percent as the basis when they made their tax buoyancy assumptions, etc.," Chief Economic Adviser V Anantha Nageswaran told reporters on August 31 after the release of the April-June GDP data, adding that "these are still early days" to say what the full-year nominal growth number would be.

Last week, Moneycontrol had reported that the finance ministry sees nominal GDP growth perhaps even exceeding the budget assumption by 50 basis points.

One basis point is one-hundredth of a percentage point.

With WPI inflation likely to come out of negative territory soon, the finance ministry is assuming a GDP deflator of 4-4.5 percent for 2023-24, Moneycontrol reported on August 22, quoting a senior government official. "As of now, we don't see anything that indicates tax receipts (growth) will be below 10.5 percent and we may reach 11 percent," the aforementioned official added.

Interestingly, Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, noted on August 31 that the expenditure side of the data seemed to be underestimating nominal GDP by 49 basis points.