The COVID-19 pandemic took a huge toll on government finances in FY2021. While a modest correction was attempted in FY2022, ICRA expects the Government of India’s (GoI’s) fiscal deficit to overshoot the budgeted target. While uncertainty persists regarding the timing, and severity of any future COVID-19 waves on the economy, we are hopeful of a modest fiscal correction in FY2023.
With a visible buoyancy in tax collections, we expect the GoI’s gross tax receipts to surpass the budgeted amount by a robust Rs 2.5 trillion in FY2022. Roughly Rs 750 billion of this would be shared with the state governments, with the balance being retained by the GoI. Adding the higher-than-budgeted surplus transfer by the Reserve Bank of India (RBI) to the anticipated extra net tax revenues, we expect the GoI’s revenue receipts (net of devolution to states) to exceed the FY2022 Budget Estimates (BE) by a considerable Rs 2.3 trillion.
Nevertheless, the net tax revenue gains to the GoI would be nullified by the expected large miss on receipts from disinvestment and back-ended spending, especially on those items that were included in the Second Supplementary Demand for Grants, such as food and fertiliser subsidies, export incentives/remissions under various export promotion schemes (such as MEIS and RoSCTL), equity infusion into Air India Assets Holding Limited, etc. Consequently, we expect the GoI’s fiscal deficit to print at Rs 16.6 trillion in FY2022, exceeding the budgeted amount of Rs 15.1 trillion.
With the state governments’ fiscal deficit projected at a relatively modest 3.3 percent of GDP in FY2022, the general government fiscal deficit is estimated at ~10.4 percent of the GDP.
The Union Budget for FY2023 will face some constraints owing to an expected slowdown in the growth in indirect taxes following the excise relief provided recently, and the moderation in nominal GDP growth to ~12.5 percent from the ~17.5 percent expected in FY2022. Besides, macro-economic uncertainty would linger on account of the potential emergence of new mutations and fresh waves of COVID-19, which may eventually necessitate additional spending by way of extension of free foodgrains scheme, and higher spending on MGNREGA.
Given this backdrop, the GoI’s ability to cement higher growth in direct taxes and garner disinvestment receipts would play a critical role in determining the extent of the fiscal consolidation that is feasible in FY2023.
Notwithstanding the lingering uncertainty, we firmly believe that the Union Budget FY2023 should ring-fence the funds that can realistically be absorbed for capital expenditure and infrastructure spending. Such outlays will help fuel the investment cycle, create employment opportunities, and improve domestic demand. At the same time, rationalising of centrally-sponsored schemes and central sector schemes would enhance fiscal space, and further improve the quality/efficiency of expenditure.
Given the uncertainty, we have considered two scenarios for the fiscal — a base case (impact of current COVID-19 wave limited to Q4 FY2022, and no fresh COVID-19 wave in FY2023), and an adverse case (moderate COVID-19 wave in FY2023). In the base case, the GoI’s fiscal deficit is pegged at Rs 15.2 trillion or 5.8 percent of GDP.
Although the planned ceasing of GST compensation could cause the state governments’ fiscal deficit to rise to the cap of 3.5 percent of the GSDP set by the 15th Finance Commission, the general government deficit would still compress to 9.3 percent of the GDP in FY2023 in the base case.
In the adverse case, we project the fiscal deficit at a higher Rs 17.9 trillion (or 6.9 percent of GDP), driven by two major outlays intended to bolster confidence among households, amid lower revenues and compressed disinvestment flows. First, a likely distribution of free foodgrains for a period of six months under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) could cost Rs 900 billion, while spending on the MGNREGA to support the rural economy could necessitate an additional outlay of Rs 300 billion over and above our baseline estimate.
While the continued formalisation of the economy would protect the downside in direct taxes, curtailed consumption could dampen indirect taxes. In the adverse scenario, we have factored in a potential net loss of revenue receipts of Rs 1 trillion, along with a shortfall of Rs 0.5 trillion in the disinvestment receipts. In this scenario, the general government fiscal deficit would be higher at 10.4 percent of GDP in FY2023, unchanged from our projection for the ongoing year.
Regardless, market borrowings appear set to rise. In the base scenario for FY2023, the GoI’s net market borrowings are placed at Rs 9.1 trillion, and at a higher Rs 10.7 trillion in the adverse scenario. Additionally, we foresee net State Development Loans (SDLs) issuance of Rs 7.3 trillion in FY2023, bloated by the expected cessation of GST compensation. This entails total Centre and state net dated market borrowings for FY2023 in a range of ~Rs 16.4 trillion (base case) to Rs 18.0 trillion (adverse case).
Adding the redemption of G-Sec and SDL indicates substantial gross borrowings in the range of ~Rs 22.6 trillion to Rs 24.3 trillion in FY2023, up from an estimated Rs 20.9 trillion in FY2022. The rise in dated borrowings will certainly exert upward pressure on yields, exacerbating the impact of the expected hike in the repo rate of 50 bps in the coming fiscal.
Aditi Nayar is Chief Economist, ICRA. Views are personal and do not represent the stand of this publication.
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