Given the current trends in growth and inflation, India's nominal gross domestic product (GDP) growth could go up to 11 percent in 2023-24, 50 basis points (bps) higher than the assumption made in the Budget for the current fiscal, a senior finance ministry official said.
With the Wholesale Price Index (WPI)-led inflation likely to come out of negative territory soon, the finance ministry is assuming a deflator of 4-4.5 percent for their nominal GDP estimates, the official said, adding that "as of now we don't see anything that indicates tax receipts (growth as per nominal GDP projections) will be below 10.5 percent and we may reach 11 percent".
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The nominal GDP growth assumption is one of the most crucial numbers in the Budget, as it determines estimates such as the fiscal deficit and the growth in tax collections. A higher nominal GDP figure versus the budgeted figure could mean that the central government's tax mop-up for 2023-24 may be better than the projections in the annual financial statement, granting greater leeway to the Centre in meeting its fiscal deficit target.
The government has pegged gross tax collections at Rs 33.6 lakh crore in 2023-24, which is 10.4 percent higher than the Rs 30.4 lakh crore projected in the revised estimates (RE) for the previous financial year. And, while the fiscal deficit target for the current fiscal year is 5.9 percent of GDP, the Centre intends to bring it below 4.5 percent of GDP by 2025-26.
Though the Budget had pencilled in a comparatively modest estimate, the Economic Survey presented a day before the Budget had projected a baseline GDP growth of 11 percent in nominal terms and 6.5 percent in real terms in FY24. In the previous financial year, actual nominal GDP growth exceeded the Budget assumption of 11.1 percent providing the Centre with more than 30 bps of room to meet its fiscal deficit target of 6.4 percent of GDP.
The official said that for nominal GDP assumptions, the finance ministry has internally estimated growth to be at least 6 percent in the current financial year. This is in line with the range for real GDP growth of 6-6.8 percent given in the Economic Survey. The Budget does not put out real or inflation-adjusted GDP growth projections.
The Centre has benefitted from two years of very high nominal GDP growth due to high inflation and a favourable base. Though there were speculations earlier in the year about slowing growth and cooling inflation hitting tax collections and upsetting the government's nominal GDP estimates, recent data sets tell a different story.
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According to the official, with headline retail inflation unlikely to drop below 5.5 percent in the current financial year and WPI-led inflation expected to come out of negative territory soon, there are no concerns surrounding nominal GDP assumptions for 2023-24.
Though India’s WPI remained in deflationary territory for the fourth consecutive month in July, registering a 1.36 percent contraction, experts see the WPI turning marginally positive in the coming months with food prices trending upwards. While Consumer Price Index (CPI)-led inflation came in at a 15-month high of 7.44 percent in July, it is expected to average far higher than 6 percent in the current quarter, as per an article in the Reserve Bank of India's (RBI) monthly bulletin. In fact, on August 10, the RBI itself raised its inflation forecast for 2023-24 by 30 bps to 5.4 percent.
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