What will be the math behind Budget 2023?

Finance Minister Nirmala Sitharaman could set its fiscal deficit target for 2023-24 at 6% of GDP, but it could be difficult to achieve.
Finance Minister Nirmala Sitharaman could set its fiscal deficit target for 2023-24 at 6% of GDP, but it could be difficult to achieve.


A likely slower economic growth next year won’t help, and high tax revenues can’t be taken for granted.

In the upcoming Union budget, the Centre will make prudent promises as always about keeping its finances in check. But this time, striking the right balance won’t be easy. For one, the 2024 Lok Sabha elections are looming, and the political temptation to spend will be unmissable. A likely slower economic growth next year won’t help either, and high tax revenues can’t be taken for granted. All this makes Budget-framing a challenging exercise.

In 2022-23, finances have been well on track, with little dent from fuel duty cuts and higher subsidy expenses. In fact the Centre’s bill on major subsidies had already reached 95% of the full-year budget by November, and analysts see it overshooting the aim by as much as 2.5 trillion by the time the year ends. But revenue has kept pace. That, too, could top the estimate by about 1.8 trillion.

You might also like 

Reliance Capital lenders plan round 2 of auction

The worst may be over for emerging markets

E-scooter maker Ather Energy sets $1 bn revenue target

Additional leeway is seen from healthy growth. The last budget pegged the fiscal deficit—the extent by which spending exceeds revenue—for 2022-23 at 16.6 trillion, or 6.4% of GDP. But that was when the Centre believed nominal GDP would rise 11.1%. That’s changed: a fresh estimate released on Friday predicts growth at 15.4%, which means the Centre can keep its 6.4% promise even if fiscal deficit overshoots the target by about 0.9 trillion.

For this year at least, this spells a clear ability to spend within the means, even while going ahead with the 7.5-trillion capital expenditure target. But the story will change in 2023-24.


View Full Image

Fiscal Hole

In its budget on 1 February, the Centre could set its fiscal deficit target for 2023-24 at 6% of GDP, but it could be difficult to achieve due to the fiscal pressures likely to arise ahead of the 2024 national elections, said analysts at Fitch Ratings last month. Take, for example, the Pradhan Mantri Garib Kalyan Anna Yojana, under which beneficiaries of the public distribution system saw their subsidized foodgrain entitlement being topped up. With the pandemic in check, the Centre was expected to end the scheme soon. And so it did, last month—but alongside it converted the existing subsidized food scheme into a free-of-cost one for a year. Commentators say it would yield an electoral dividend. The reorientation will even save the government money worth 0.6-0.7% of GDP, but it also stands to lose revenues that it could have made from the subsidized food sales, Nomura said in a recent note.

Meanwhile, the government may also have to continue robust capital expenditure to support slowing growth, which will bring challenges of its own. With analysts forecasting a nominal GDP growth of about 11% in 2023-24, the fiscal deficit may have to be contained at 18.8 trillion for it to be 6.2% of GDP, and 18.2 trillion for it to come down to 6%, Mint calculations show. The Centre aims to bring the fiscal deficit down to 4.5% by 2025-26.

The Budget itself is not likely to announce a sharp rise in revenue expenditure, according to economists. But an expected growth moderation, rural distress and external uncertainties could mean that by this time next year, the Centre may be forced to spend more than it will budget. (This year, too, apart from additional grants on food and fertilizer subsidies, the government has sought the Parliament’s nod for higher spending for rural areas.)

Tax Trends

This year robust tax collections have helped offset some of the unforeseen spending, which came in the form of excise duty cuts on fuel and higher subsidy bills following the sharp rise in prices as a result of the Russia-Ukraine war. However, a closer look at the numbers shows the government may have underestimated its gross tax collections in the first place. The Budget projected 27.6 trillion in gross tax collections, but had already earned 65% of it by November, the latest month with available data.

View Full Image

In 2021-22 as well, the actual tax collections have overshot even the revised estimate by nearly 2 trillion. This is a reversal in the earlier trend, when the government used to overestimate tax mop-ups (and underachieve) between 2018-19 and 2020-21. This used to put fiscal strain by the end of the year. With growth set to slow down in 2023-24, the rapid growth in tax collections so far could also weaken, and if the government chooses to continue with conservative tax targets, it may limit the scope for more announcements in the Budget itself, which will be closely watched for election sops, economists said.

Goods and services tax (GST) collections have been the biggest contributor to gross tax revenue for the past three years (2.9% of GDP in 2021-22), having surpassed corporate tax collections in 2019-20, when corporate tax cuts were announced. Robust GST collections this year have also been a major boost for the government’s coffers. However, higher revenue through indirect tax collections has been criticized by many policymakers and economists as it puts undue burden on poor Indians who are already reeling under higher inflation and could prove detrimental to a revival in consumption.

The government faces an unenviable fiscal tightrope again.

Elsewhere in Mint

In Opinion, Manu Joseph says awful arguments were made against demonetization. Kaushik Basu argues India should propose a G Minor at the G20. Diva Jain says news of industrial policy’s demise was vastly exaggerated. In Long Story, Minister of State for IT Rajeev Chandrasekhar clears misconceptions surrounding a slew of pivotal digital legislation.


Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.



Switch to the Mint app for fast and personalized news - Get App