General Government fiscal deficit to correct to 9.3% of GDP in FY2023 from 10.4% of GDP in FY2022: ICRA

12 Jan 2022 , 02:57 PM

ICRA expects a miss in the disinvestment target to cause the Government of India’s (GoI’s) fiscal deficit to print at Rs. 16.6 trillion or 7.1% of the GDP in FY2022, overshooting the budgeted target. With the state governments’ fiscal deficit projected at a relatively modest 3.3% of GDP in FY2022, the General Government fiscal deficit is estimated at ~10.4% of the GDP.

In the base case for FY2023, ICRA sees the GoI’s fiscal deficit moderating to Rs. 15.2 trillion or 5.8% of GDP. Although the planned ceasing of GST compensation could cause the state governments’ fiscal deficit to rise to the cap of 3.5% of the GSDP set by the Fifteenth Finance Commission, the General Government deficit would still compress to 9.3% of the GDP in FY2023.

According to Ms. Aditi Nayar, Chief Economist, ICRA Ltd: “With a palpable buoyancy in tax collections, we expect the GoI’s gross tax receipts to overshoot the budgeted amount by a healthy Rs. 2.5 trillion in FY2022. However, 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”.

“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% from the ~17.5% 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,” Ms. Nayar added.

“Notwithstanding the lingering uncertainty, we 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,” Ms. Nayar said.

Given the uncertainty, ICRA has highlighted two scenarios for the fisc — a base case (impact of current Covid wave limited to Q4 FY2022 and no fresh Covid wave in FY2023) and an adverse case (moderate Covid wave in FY2023). In the base case, the GoI’s fiscal deficit is pegged at Rs. 15.2 trillion or 5.8% of GDP, with net G-sec issuance placed at Rs. 9.1 trillion.

In the adverse case, ICRA projects the fiscal deficit at a higher Rs. 17.9 trillion (or 6.9% of GDP), driven by two major outlays intended to bolster confidence amongst households, amidst lower indirect taxes 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. 0.9 trillion, while spending on the MGNREGA to support the rural economy could necessitate an additional outlay of Rs. 0.3 trillion over and above our baseline estimate.

“While ICRA believes that the continued formalisation of the economy would protect the downside in direct taxes, curtailed consumption could dampen indirect taxes. In the adverse scenario, we foresee a potential net loss of revenue receipts of Rs. 1.0 trillion, along with a shortfall of Rs. 0.5 trillion in the disinvestment receipts. In this scenario, the GoI’s net market borrowings are placed at a higher Rs. 10.7 trillion,” Ms. Nayar added.

Assuming that 80% of the states’ estimated fiscal deficit of Rs. 9.1 trillion is funded by the State Development Loans (SDLs), suggests a net issuance of Rs. 7.3 trillion. 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 exert upward pressure on yields, exacerbating the impact of the expected hike in the repo rate of 50 bps in the coming fiscal.