Budget 2022: General Government fiscal deficit to correct to 9.3% of GDP in FY2023 from 10.4% of GDP in FY2022, ICRA report says

Government’s fiscal deficit for FY22 could likely be around Rs 16.6 trillion or 7.1 per cent of the Gross Domestic Product (GDP) in FY2022, overshooting the budgeted target, according to a report by ICRA. The General Government fiscal deficit is estimated at 10.4 per cent of the GDP.

“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,” Aditi Nayar, Chief Economist, ICRA Ltd said.

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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,” she further said.

Back-ended spending includes especially 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, Nayar said in this report.

“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,” Nayar added.

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.

However, the General Government deficit would still compress to 9.3 per cent of the GDP in FY2023, this report further said.

Given the uncertainty, ICRA has highlighted two scenarios for the fiscal deficit – 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 for FY2023, ICRA sees the GoI’s fiscal deficit moderating to Rs 15.2 trillion or 5.8 per cent of GDP.

Meanwhile, the state governments’ fiscal deficit is projected at a 3.3 per cent of GDP in FY2022, this report said calling it “relatively modest”.

Although the planned ceasing of Goods and Service Tax (GST) compensation could cause the state governments’ fiscal deficit to rise to the cap of 3.5 per cent of the GSDP set by the Fifteenth Finance Commission, this report further said.

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 per cent from the 17.5 per cent expected in FY2022, she said.

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,” 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,” Nayar said.

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