Govt leans heavily on nominal revenue growth to beat fiscal blues

Only two months into the current fiscal year (FY23), it is now clear that the budgeted fiscal deficit target of 6.4 per cent of GDP is a tall task due to a number of reasons. These include revenue forgone because of excise duty cuts on petrol and diesel and other items, and a higher expenditure burden due to food and fertiliser subsidies.

In such a situation, the Centre is looking at eliminating wasteful expenditure in welfare and subsidy schemes. But there could be two silver linings: Inflation, and the Centre’s own conservative budget estimates (BE) for FY23. It is a norm that periods of higher inflation lead to higher tax collections and higher nominal gross domestic product (GDP). And going by the trends in FY22, tax revenue growth in FY23 could be substantial year-on-year (YoY).

At a media interaction on Tuesday, Chief Economic Adviser V Anantha Nageswaran said that inflationary pressures may lead to nominal GDP for the year being higher than the budgeted 11.2 per cent, which will help keep the fiscal deficit in check. This is because fiscal deficit is measured as a percentage of GDP.

Analysts agree with this assessment. “Even as the government and the Reserve Bank are jointly coordinating to tame inflation, and the government has unveiled many fiscal measures, we believe that a higher nominal GDP growth rate in the ultimate analysis could offset a large part of expenditure increases through higher tax revenue,” said Soumya Kanti Ghosh, group chief economic adviser, State Bank of India.

“There are several risks to the fiscal deficit target of Rs 16.6 trillion (6.4 per cent of GDP) for FY23. However, a large part of this would be offset by appreciably higher than budgeted taxes, limiting the extent of the overshoot in the Centre’s fiscal deficit in FY23 to Rs 1 trillion above the budget estimate, even if there are no expenditure savings,” said Aditi Nayar, chief economist with ICRA.

Nayar added that a higher nominal GDP compared to budget estimates was likely to contain the expected fiscal deficit at 6.5 per cent of GDP.

An example of conservative targets can be seen in FY22. The net tax revenue BE for FY22 was Rs 15.45 trillion. According to the provisional fiscal deficit numbers released on Tuesday, the provisional net tax revenue receipts for last year were Rs 18.2 trillion, a jump of 17.8 per cent.

The FY23 net tax revenue target stands at Rs 19.3 trillion, a jump of just 6 per cent over FY22 provisional estimates, while the nominal GDP BE is 11 per cent higher than FY22, and that too is being touted as a conservative estimate.

“Higher inflation is going to be a drag on the household consumption. It will however lead to higher tax collection for the government (inflation tax) due to higher nominal GDP. However, the headwinds from Ukraine-Russia conflict will cast a shadow on FY23 budgeted expenditure by putting pressure on subsidy and other income support measures of the government,” said Sunil Kumar Sinha, principal economist with India Ratings.

India’s fertiliser subsidy bill for FY23 could rise even further to around Rs 2.5 trillion, as prices of chemical nutrients and natural gas are expected to remain elevated, a top government official told Business Standard. The FY23 fertiliser subsidy BE is Rs 1.05 trillion.

Finance Minister Nirmala Sitharaman had said on May 21 that fertiliser subsidy would require an additional outlay of Rs 1.10 trillion over and above the budgeted amount, taking the outlay to Rs 2.15 trillion.

If the burden does hit Rs 2.5 trillion, that would mean extra spending of around Rs 35,000 crore.

The impact of the latest round of excise duty cuts on petrol and diesel will be around Rs 85,000 crore for the year, while the recent import duty cuts on other items will lead to revenue foregone of Rs 10,000-15,000 crore.

Additionally, the decision to provide a subsidy of Rs 200 per gas cylinder (up to 12 cylinders) to over 90 million beneficiaries of Pradhan Mantri Ujjwala Yojana will lead to revenue foregone of Rs 6,100 crore a year for the exchequer.

Apart from the already announced Rs 1.10-trillion increase in fertiliser subsidy, the government’s decision to extend the PM Garib Kalyan Anna Yojana (PMGKAY) till September will increase the food subsidy outlay for FY23 to Rs 2.87 trillion from the BE of Rs 2.07 trillion.