The trouble with budget assumptions and what that means, explained

Much has already been written and said about the budget's astonishingly low assumption of 11.1 percent for next year's nominal GDP. Only on one occasion in the last 10 years has a budget assumed such a low nominal GDP growth number. That was for FY17. On that occasion, actual nominal GDP growth ended up exceeding the assumption of 11.0 percent by 10 basis points.

What of FY23? The Economic Survey has forecast a real GDP growth of 8.0-8.5 percent for the next financial year. Economists from outside the government expect a number closer to 7.5 percent. For the nominal and real GDP growth projections to be met, the GDP deflator would have to fall below 4.0 percent. Considering Wholesale Price Index inflation has averaged 12.4 percent in April-December 2021, this looks unlikely.

"We believe if growth comes back riding on the spending prowess, the nominal GDP projection may be an underestimate. This may thus provide even some more additional spending room for the government," wrote Soumya Kanti Ghosh, State Bank of India's group chief economic adviser, in a post-budget report.

Tax revenues

Gross tax collections are seen 9.6 percent higher in FY23. But then, if the assumption for nominal GDP growth is low, it is bound to impact the tax collection estimates.

However, one must step back and look at the revised estimate of Rs 25.16 lakh crore for FY22. This represents a 13.5 percent increase from the budget estimate. But in the first nine months, the Centre's gross tax revenue is Rs 19.29 lakh crore. This implies the government expects to collect Rs 5.87 lakh crore in January-March 2022. While this isn't an insignificant sum, this would be 14.5 percent lower than what the government collected in the last quarter of FY21! What reason could there be for the government to think it would collect less tax in the current quarter than it did in the corresponding period last year?

On the whole, the revised estimates imply the government expects its revenue receipts in the current quarter to be 36.4 percent lower compared to what it collected in January-March 2021!

Without wanting to sound conspiratorial, the underestimation of FY22 revised estimates is noteworthy as they make the FY23 budget estimates look good. Had the budget assumed zero year-on-year growth in January-March 2022, the revenue receipts estimate for FY23 would be 3.2 lower compared to the current year. That would not have made for pleasant reading.

Non-tax sources

While a low nominal GDP growth number does not influence the money that would accrue from non-tax sources, even estimates for this source of income has left economists puzzled.

Outside of taxes, one of the two big chunks of revenue for the government comes in the form of dividends from the Reserve Bank of India (RBI). For FY23, the government expects to receive Rs 73,948 crore as dividend from the central bank and state-run lenders.

Is this figure lower than it should be? Perhaps. The revised estimate for FY22 is Rs 1.01 lakh crore after the RBI transferred an unexpectedly large dividend of Rs 99,122 crore. Sure, the central bank may transfer a smaller surplus in FY23. But the lower budget estimate for FY23 is puzzling because the dividend transferred by the RBI in FY22 was for a truncated nine-month period on account of it shifting to an April-March financial year from July-June. As such, the dividend the RBI will transfer to the Centre in May 2022 will be for a full 12-month period.

The second chunky revenue source is disinvestment. And the numbers are even more perplexing. As at the end of January 2022, the government's disinvestment receipts amounted to Rs 12,030 crore.

"However, the full-year target has been kept at Rs 78,000 crore, implying that Rs 66,000 crore worth additional disinvestment is still expected to materialise in Feb-Mar 2022. This is confusing," noted Motilal Oswal analysts.

"If the Initial Public Offering of LIC (Life Insurance Corporation of India) is completed in FY22 itself, it is likely to yield a higher amount of receipts; but if it does not materialise this year, then FY22 targets will be missed by a large margin," they added.

For the record, finance ministry officials said on February 1 that the LIC IPO will go through before the current financial year ends. If the IPO occurs in FY23, then the disinvestment budget estimate of Rs 65,000 crore for next year will in all likelihood be exceeded.

Expenditure

The consensus assessment of the budget is that it is supportive of growth. Capital expenditure has been pushed up to Rs 7.50 lakh crore for FY23, up from the revised estimate of Rs 6.03 lakh crore for this year. But questions are already being raised about the government's ability to meet next year's target.

According to Bank of America Securities, the Centre's capital expenditure in FY23 may fall short of the target by Rs 1 lakh crore due to "constraints to spending capacity coming into play".

These constraints are visible already. In April-December 2021, the Centre's capital expenditure totalled Rs 3.92 lakh crore. To meet the budget estimate, the government would have to spend over Rs 54,000 crore on average in each of the last three months of FY22. This number rises to over Rs 70,000 crore if the revised estimate is to be met.

It is worth adding that the Centre's capital expenditure has exceeded Rs 57,500 crore in only one month of FY22. This was in December 2021, when it came in at a record high of Rs 1.18 lakh crore, boosted only by the equity infusion of over Rs 50,000 crore into Air India.

The times are undeniably uncertain. The budget numbers seem even more so.