How rising inflation could help Govt balance its fiscal math

Fiscal deficit is expected to be higher in absolute terms by at least Rs 1 lakh crore, but the gains from a rise in nominal GDP (which takes into account inflation) will help in meeting the budget targets, experts said.

What do experts say about the government’s fiscal math?

India Ratings, a Fitch Group company, in its report, said the revenue and fiscal deficits are expected to come in at Rs 10.58 lakh crore and Rs 17.61 lakh crore in FY23, higher than the budgeted Rs 9.9 lakh crore and Rs 16.61 lakh crore, respectively. “However, the higher-than-budgeted nominal GDP would help in meeting the budgeted target for revenue and fiscal deficit at 3.8% and 6.4% of GDP, respectively, in FY23,” it said.

The cushion provided by an overshoot in revenue projections and stronger than budgeted nominal growth will help absorb higher spending needs, DBS said in a note. “The FY23 fiscal math has benefited from: a) strong nominal GDP growth of around 16% vs budgeted 11%; b) above target tax collections due to better growth, reopening boost, formalisation, and tighter compliance; c) pick up in nominal GST collections, which have helped to offset lower RBI dividends, fuel excise cuts, higher subsidies, and divestment miss,” it said.

As per the latest data on government finances for April-November, the first eight months of this fiscal, the deficit reached 59% of the full-year target, higher than 46% in the corresponding period a year ago. Direct tax collections rose 24% YoY, while under indirect taxes, average monthly GST receipts are up 20%. Non-tax revenues have grown at a slower pace with a weaker-than-expected dividend from the Reserve Bank of India and slower divestment proceeds, with non-tax revenue at 74% of the year-end target during April-November as against 92% a year ago.

What will be the effect on next financial year’s Budget math?

The pitfall of this gain, however, would be seen next fiscal wherein a potentially slower growth rate and tepid tax revenues will adversely affect the government’s budget math. The government will face a challenge with slower real and nominal GDP growth amid weakening demand conditions, a slowing global economy and normalising base effects from the pandemic.

“With an expected retail inflation print at just 4.3% and a mere 1% growth in the wholesale price index in FY24, GDP deflator could be ~2%, dragging down India’s nominal GDP growth to the lowest level compared to any year between early 1970s and FY19 (i.e., half-a-century pre-Covid period). Such a slow growth rate would have some serious implications for the macro-economy and financial markets,” Motilal Oswal said in a report.