The mounting uncertainty of the third wave of the pandemic will force the coming budget to press the fiscal pedal more to support the fragile recovery, pushing a 6.5 percent budget deficit as the government is likely to budget for about Rs 42 lakh crore from capex next fiscal, says a brokerage report.
The 2022 budget will be presented on 1 February. The 2021 budget had set the budget deficit for FY22 at 6.8 per cent or Rs 12.05 lakh crore, down from 9.5 per cent in FY21 when it had also borrowed Rs 12 lakh crore, but in percentage terms it rose sharply given the huge contraction of the economy by 7.3 percent in the past year.
The deficit for FY21 rose after the government raised its gross market target for borrowing from the budget in May 2020 to Rs 12 lakh crore from Rs 7.8 lakh crore budgeted in February 2020, after the pandemic affected all budget figures.
The government is expected to continue to press the fiscal pedal to support the economy. While the budget deficit could be revised modestly upwards to 7.1 percent from 6.8 percent budgeted in FY22, stronger nominal GDP growth will keep the government at the budget deficit announced in the current budget, said Rahul Bajoria, director general and chief economist at Barclays. India, said in a note.
Accordingly, the consolidated budget deficit will reach 11.1 percent of GDP this fiscal year (Center at 7.1 percent and states at 4 percent), it warned that fiscal consolidation will take longer.
Combined budget deficits will only gradually decline to 7 percent of GDP over the next five years, he added.
For FY23, he projected a consolidated deficit of 10.5 percent of GDP, with the Center at 6.5 percent, slightly above the 6.3 percent estimated in the 2021 budget.
The government is expected to estimate Rs 17.5 lakh crore or 6.5 percent of GDP in budget deficit in FY23, which would allow spending to increase to more than Rs 41.8 lakh crore, according to Bajoria.
He does not foresee any rapid fiscal consolidation and expects credit needs to remain high with the government borrowing Rs 16 lakh crore next fiscal year (versus Rs 12 lakh crore this fiscal year).
He attributed the higher deficit to higher social spending and production-related incentives, which will remain key fiscal priorities of the new budget.
Prioritizing capital spending is critical to bolster the fragile growth recovery, as states are likely to cut capital spending (capex) rather than lose protected GST compensation funds amid weak private investment.
Still, he expects the government to remain on track in providing fiscal support to the economy, adding that it remains possible to meet the deficit in the medium term. In fact, he said increased fiscal pressure now to support growth could help the government consolidate the deficit in the coming years.
In terms of revenue, Bajoria expects it to exceed budget estimates as strong nominal growth boosted tax revenue in FY22 and is likely to continue into FY23.
Non-tax revenues are likely to be in line with budgetary estimates. Large revenue collections give the government plenty of room to step on the spending pedal.
His optimism stems from the belief that, despite a likely larger deficit than originally budgeted, the government is unlikely to increase market borrowing, as any incremental spending is likely to be financed from high cash balances and small savings.
The report also sees nominal GDP growth in FY22 of 19.6 percent, up from the government projection of 17.4 percent and 13.6 percent in FY23.