Budget 2022: Lower than expected fiscal deficit number, monetisation

By Deepak Jasani 

The Union Budget for FY23 will be presented at a crucial time. Covid and its variants have still not disappeared and keep impacting the normalization of economic activities. Despite this, the revenue collections have been good this year helped by buoyant direct tax collections and higher imports/fuel taxes. The imminent withdrawal of liquidity and increase in global interest rates could impact FPI flows into India for some time. 

While the divestment target for the year seems too difficult to achieve (Rs 9330 crore collected so far vs Rs 175000 crore target for the year), the Fiscal deficit for FY22 could exceed that budgeted solely due to this shortfall despite the cushion available by higher than expected nominal GDP growth. In such a circumstance, Budget provisions will need to give the right signals to the Indian people and investors from abroad.  

As far as fiscal deficit is concerned, assuming that both BPCL and LIC divestment get postponed to FY23, we could end FY22 with a deficit of ~7% compared to the budgeted 6.8% despite gross tax receipts exceeding the target by 11% of the Budget. Adding the state Govt deficit of 3.2-3.3% of GDP, the combined fiscal deficit will be above 10%. This situation cannot continue for long. The global credit rating agencies have given the benefit of pandemic for India posting these wide deficits year after year. 

Although the fiscal deficit for Apr-Nov 21 was just 46% of the full-year target, back-ended spending, especially on 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 (totalling Rs 3 lak crore) could result in higher fiscal deficit. 

In FY23 we could see the winding down of pandemic stimulus plus normalization of economy (fingers crossed) and divestment of BPCL and LIC. Hence a fiscal target of any thing around or just under 6% is doable. In case this comes in at close to 5.5%, then the street may get excited. However nominal GDP growth may come in slower at ~13% vs ~18% in FY22. Also if the Govt is required to do additional spending by the way of extension of free foodgrains scheme for a period of six months and higher spending on the MGNREGA, then the path to fiscal consolidation would be even tougher.

We need to remember that in case the interest rates continue to keep rising, the gross borrowing by Centre and states in FY23 of Rs.22-24 trillion could create an additional pressure on the rates. However focus on fiscal consolidation, continued RBI intervention in the bond market, possibility of inclusion in global bond index and some moderation in inflation in H2 FY23 is likely to provide support…