Budget 2023-24: time to normalize growth and restore fiscal consolidation

Union Budget 2023-24 would be the first normal budget after the COVID-19 shock and amid global geopolitical developments. 

In brief

• India has outperformed its peers in restoring growth and containing inflation.
• Even though the majority of currencies depreciated against the US$ in 2022, the depreciation of INR against the US$ has been relatively lower than that of other major currencies.
• Enabled by relatively low global crude prices and high tax buoyancy, Budget FY24 may aim at laying down a solid foundation for a stable medium-term growth accompanied by a credible fiscal consolidation glide path. 

According to the OECD’s Economic Outlook (November 2022), India is projected to grow by 6.6% in FY23, significantly higher than the corresponding growth prospects for the US, UK, and the OECD region at 1.8%, 4.4% and 2.8% respectively. CPI inflation in India is projected at 6.8% for FY23, much lower than the corresponding forecasts at 8.0%, 8.9%, and 9.4% respectively for the US, UK, and the OECD region. Although the majority of currencies depreciated against the US$ in 2022, YEN and GBP depreciated more at 13.4% and 10.7% respectively between April and November 2022, compared to the India Rupee at 7.4%. 

According to the RBI’s Professional Forecasters Survey (December 2022), India’s current account deficit is projected at 3.5% of GDP in FY23 and its general government fiscal deficit is expected to be at 9.6% of GDP. The current account deficit largely depends on global economic recovery, while the government borrowing requirements would depend on determined fiscal correction. The forthcoming FY24 Budget provides the government with an opportunity to spell out a credible fiscal consolidation path. 

Growth prospects for FY23 and FY24

A distinguishing feature of India’s growth experience of FY22 and potentially, the full year of FY23 has been the large excess of nominal growth over real GDP growth, reflecting the high implicit price deflator (IPD)-based inflation. In FY22, real and nominal GDP growth were 8.7% and 19.5% respectively, implying that the nominal growth exceeded the real growth by 10.8% points. In 1HFY23, real GDP growth was at 9% while the nominal growth was at 21.2%, indicating an excess of 12.2% points. For 2HFY23, these trends are likely to continue, although they may be somewhat moderated. The RBI expects the FY23 growth at 6.8%. Although it does not provide a projection for nominal GDP growth, our expectation, based on current inflationary trends, is that it may be close to 17% in the current year. In FY24, we expect the real and nominal GDP growth to be close to 6.5% and 14%, respectively.  

Tax revenues: performance and prospects

After losing significant ground in terms of growth in FY20 and FY21, GoI’s gross tax revenues (GTR) grew by nearly 34% in FY22, reflecting a large base effect. A strong growth in GoI’s tax revenues is also visible in FY23, at least during the first seven months for which data are available. CIT, PIT and GoI’s GST collections have shown a robust growth during April-October FY23 respectively at 24.1%, 27.7%, and 27.2%. Even if these revenue trends are slightly moderated in the latter part of the fiscal year, we expect the GoI’s GTR to show a growth of 15.3% assuming a buoyancy of 0.9 and an estimated nominal growth of 17% (Chart 1). 

This level of GTR growth may be consistent with a normalizing GDP growth, although even this reflects, to some extent, the effect of the excess of the nominal over real growth. The estimated magnitude of GTR in FY23 amounts to INR31.2 lakh crore, exceeding the budgeted magnitude of INR27.6 lakh crore by nearly INR3.6 lakh crore. This provides a higher base of GTR for projecting FY24 tax revenues (Table 1). In FY24, assuming a buoyancy of about 1.1 and an estimated nominal growth of 14%, GoI’s GTR would grow by 15.4%, reaching a level of about INR36 lakh crore.

Expenditures: continued emphasis on infrastructure expansion

There is a need to re-prioritize the expenditures of the Government of India over the medium term to ensure that the use of borrowing for revenue expenditures is minimized and eventually eliminated. This will imply that the entire fiscal deficit, which is liability creating, will be used for capital expenditures, creating corresponding assets. In the recent past, a significant portion of fiscal deficit was accounted for by revenue deficit. The ratio of revenue deficit to fiscal deficit peaked at close to 80% in FY21 but improved in FY22. It is expected to further improve in FY23 (BE). In fact, in the first seven months of FY23, this ratio was at 50.8%. Although the level of fiscal deficit has remained high in FY22 and FY23, the improvement in the RD/FD ratio also reflects a falling share of revenue expenditures in GoI’s total expenditures. Within revenue expenditures, the share of health and education require to be increased while that of interest payments may be incrementally brought down.

Owing to the high global crude prices averaging close to US$100/bbl. during the first eight months of FY23, there would be major upward revisions in the budgeted subsidies in FY23, particularly fertilizer subsidies. Already, as per the first batch of Supplementary Grants, additional fertilizer subsidies amounted to INR1.09 lakh crore, which implies that the total fertilizer subsidy outgo would be nearly double the budgeted amount at INR1.05 lakh crore. In the case of food subsidies, an additional expenditure of INR60,110 crore has now been included in the Supplementary Demand over and above the budgeted amount of INR2.07 lakh crore. This is largely attributable to the extension of the GoI’s free food distribution scheme under PMGKAY.   

Fiscal imbalance: restoring consolidation

In recent years, there has been a considerable slippage in GoI’s fiscal deficit to GDP ratio from its norm, as specified in the 2018 FRBMA. Having peaked at 9.2% in the COVID-19 year of FY21, GoI’s fiscal deficit to GDP ratio fell to 6.7% in FY22 and is likely to fall further to 6.4% in FY23, maintaining the budgeted target (Chart 2). A further graduated reduction will take it to a level of 4.5% by FY26 as envisaged by the 15th FC and endorsed in the FY23 Union Budget. We expect that by FY27, it would reach a level of 4%.

As the fiscal deficit to GDP ratio is reduced along the glide path, the debt-GDP ratio would also start falling. Along with that, the interest payment to revenue receipts ratio for the GoI would also fall, facilitating adherence to the fiscal deficit target. Under certain assumptions regarding growth, it may be shown that the GoI’s debt-GDP ratio would eventually stabilize at 40% if a fiscal deficit to GDP ratio of 4% is maintained for several years. Meanwhile, the case for recasting the GoI’s fiscal deficit target to 4% of GDP should be examined by an Expert Committee as recommended by the 15th FC (High-Powered Intergovernmental Group)¹.