Budget preview: Consolidating under the cover of growth says Nomura

In Nomura’s base case, they expect the centre’s fiscal deficit to narrow to 5.3% of GDP in FY22 from a projection of 6.8% in FY21. The Union Budget for FY22 (year-ending March 2022) will be presented on 1 February. In this note, Nomura presents their assessment of FY21 and expectations for FY22. The central government’s fiscal deficit widened to 6.8% of GDP in FY21, nearly double the original budget target of 3.5%, but better than previously feared (8%), aided by a sequential improvement in revenues and a muted rise in spending. With expenditures supported by strong nominal growth, optimism on tax collection and the government’s aggressive estimates for disinvestment and non-tax proceeds, Nomura expects the fiscal deficit target to be set at 5.3% of GDP in FY22.

Market borrowings:

Nomura expects the government to fund around 70% of the fiscal deficit, through net market borrowing (Rs 8.3 trn in FY22), which suggests gross market borrowing of Rs 11 trn in FY22, down from Rs 13.1 trn in FY21.

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Key themes:

Unsurprisingly, many of the key themes in the Budget will revolve around Covid-19, either directly on health issues (vaccines), or regulatory support to sectors most affected (e.g., hospitality, retail, aviation). In addition, infrastructure, agriculture, the social sector, promotion of domestic manufacturing, alongside incentives to boost construction and housing are likely to be the focus.
Overall, after a fiscally tumultuous FY21, Nomura expects a significant acceleration in nominal GDP growth and a greater reliance on asset sales to enable the government to keep spending at elevated levels while still managing to consolidate in FY22. The balance between ambition and credibility, as it relates to the medium-term fiscal consolidation path, will be an important macro determinant for rating agencies, in Nomura’s view.

Backdrop to the FY22 Budget

FY21: material fiscal slippage has somehow been avoided

The fiscal trends during FY21 turned a corner in the October-December quarter. The stronger pace of economic normalisation has translated into a sequential improvement in revenues, particularly in GST and income tax collection. This change in fortune comes alongside already-elevated excise duty collections (up 48% yoy during April-Nov), helped by higher petroleum taxes. However, the increase in revenues is unlikely to reverse the unprecedented drop in collections earlier in the year.

On expenditures, the government finally increased its spending in October and November, after months of fiscal compression. This was primarily driven by capital expenditures, while revenue expenditure growth has been trending lower, although the latter has picked up sequentially recently (Figure 2). Overall, we expect tax revenues (net) to contract by 7.2% yoy in FY21 after rising 2.9% in FY20, while spending likely rose by a more muted 6.6% in FY21 after a 16% gain in FY20. Thus, Nomura expects the fiscal deficit to widen to 6.8% of GDP in FY21, nearly double the original budget target of 3.5% set before the pandemic, but much better than initial estimate of over 8% in the midst of the pandemic.