Small miss in FY24 nominal GDP growth won't upset Budget targets, says source

Data released on August 31 showed India's nominal GDP growth cooled to 8 percent – the lowest in nine quarters.

India's nominal GDP growth should come in at 10.5 percent in 2023-24 as estimated by the central government and a deviation from this aim, if any, will be too narrow to upset Budget targets, a government official said.

Recently, questions have emerged on the Centre's ability to meet its Budget targets for 2023-24 with nominal GDP growth slowing down.

Data released on August 31 showed India's nominal GDP growth cooled to 8 percent – the lowest in nine quarters. The last time India's nominal GDP grew at a slower pace was when it rose by 6.3 percent in October-December 2020 – the year that was hit the most by the Coronavirus pandemic.

However, according to this official, considering the pace of overall tax collections so far and "some positives on the non-tax revenue side as well, the Centre expects to meet its Budget targets" and is therefore well-placed to stick to its budgeted fiscal deficit aim for 2023-24.

“As of now, the tax trends are meeting the Budget target. The situation for revenues, from both direct and indirect taxes, is well placed. Any margin of error in the nominal GDP, if at all, cannot derail Budget estimates,” this official said.

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. A fall in inflation, leads to a fall in the GDP deflator too. India's wholesale inflation remained in the deflationary zone for the seventh month in a row in October, coming in at -0.52 percent, data released by the commerce ministry on November 14 showed.

A lower nominal GDP figure versus the budgeted figure typically means that the central government's tax mop-up for 2023-24 could fall short of projections in the annual financial statement, limiting the Centre's ability to meet 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.

The official added that the Centre expects to stick to this fiscal glide path as well.

Market Borrowing
The official said that the government is looking to keep its market borrowing programme for the current financial year predictable, adding that the Centre has been maintaining a higher cash position taking into account repayments that are due in November-December.

The Centre’s cash balance is around Rs 2 lakh crore currently, the official added.

The finance ministry, on September 26, announced that it will borrow Rs 6.55 lakh crore through the sale of dated securities in the second half of the current fiscal, in line with its budget target. This would include green bonds worth Rs 20,000 crore.

While, the Centre is not happy with the greenium garnered so far on green bond issuances in FY24, it expects a better premium on the 30-year paper, the official said. The Centre's green bond issuance comprise Rs 10,000 crore of 30-year green bonds, and an additional Rs 5,000 crore each of bonds with maturities of 5 years and 10 years.

‘Greenium’ is the premium investors offer to pay for green bonds over other bonds as funds raised via these papers are utilised on climate-friendly projects.

The official said the Centre is keeping a "hawk's eye" on government bond yields while refusing to comment on if the Reserve Bank of India (RBI) will soon start conducting open market sales (OMOs) to manage liquidity as indicated by the central bank back in October.

OMO is a term which refers to the purchase or sale of government securities in the open market by the Central bank.