SBI Ecowrap: India's FY23 fiscal deficit may be approximately 6.5%

The report stated that the fiscal deficit is projected to be around 6.5% of GDP (Budgeted: 6.4% of GDP) because greater nominal GDP will act as a cushion.

In comparison to Q1 FY22, where the fiscal deficit was 18.2% of the annual objective, Q1 FY23's fiscal deficit was 21.2%. A record amount of GST income has been generated, and this substantial tax collection has been made possible by increased compliance and increasing economic activity.

In terms of spending, the government has increased capital expenditure (23.4% of BE in FY23 versus 20.1% of BE during the same period in FY22), which is positive for our economic potential.

While forecasts for the current financial year's current account deficit (CAD) have been updated from 3.2% of GDP to 3.7% of GDP in the report.

For the past five months in a row, the goods and services tax (GST) has remained above Rs1.4 lakh crore, and the most recent figures for July 2022 revealed a 28% increase to Rs1.49 lakh crore from the same month last year.

"Inflation-adjusted GST revenue estimates for FY23 reveal that the average collection has been close to Rs1.20 lakh crore. Inflation-adjusted GST has increased by 26% from its pre-pandemic level of Rs95,000 crore "says the report.

In the meantime, the government has proposed a number of steps in this fiscal year to stop increasing inflation, including a reduction in the excise tax on oil, more fertilizer, and gas subsidies, which will increase spending. However, it is anticipated that the budgetary position would improve thanks to GST and increased tax collection that exceeds the budget.

The highest monthly change in the trade deficit since September 2021 (when the trade deficit expanded by $9.7 billion m-o-m) is $4.8 billion for July 2022. Between April and July 2022, India's trade deficit totalled $100 billion. If we annualize this trade deficit figure, it equals 8.5% of our FY23 GDP predictions.

Future inflation may not have a cascade effect on runaway currency rate dynamics even though crude has shown signs of easing, further calming inflationary concerns locally. This is because feelings in the South China Sea may guide the erratic global sentiments, which is a paradox.

The report also stated that the gap between 2-year and 10-year Treasury yields shifted to a new extreme on yield curve metric, with the long-term yield falling considerably, reaching levels not seen since 2000, and that yields in the US spiked across tenors as a result of hawkish comments from Mary Daly and Charles Evans showcasing increased confidence about the prospect of the Fed continuing to hike interest rates.