Home / Opinion / Views /  Sitharaman’s FY 23 fiscal deficit target not as out of reach as it seems

Mint has reported that Finance Minister Nirmala Sitharaman has plans to stick to the fiscal glide path that she first presented – somewhat tentatively, given what lay ahead was uncertain and unpredictable at that time – in last year’s Union Budget. At the time of presenting this year’s budget, she had reaffirmed that she wanted to stay on that path without committing to it in the fiscal statement placed in Parliament along with the budget papers as required by the FRBM (Fiscal Responsibility and Budget Management) Act.

The statement did not bind her to a path, explaining that it was difficult to commit to any targets for as long as the situation was uncertain due to the pandemic and its aftershocks. This path commits her to bringing the fiscal deficit for FY23 to 6.4 per cent of gross domestic product, target a fiscal deficit of 5.7-5.8 per cent for FY24, and 4.5 per cent for FY26.

Barely three weeks after she presented the budget on February 1, the war broke out in Ukraine. The fiscal arithmetic went awry. Latest updates show that the subsidy bill for food, fuel and fertiliser heads has overshot the budget estimates of Rs. 3.18 lakh crore by Rs. 2.5 lakh crore.

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If the finance minister decides to stay committed to the fiscal glide path despite these challenges, it will be a prudent and sound policy choice.

Remember, the fiscal deficit had widened to 9.3% in FY21 as the pandemic hit revenues and increased relief spending. The surge in savings in the economy, as the pandemic lockdowns brought investments and consumption to near halt, had helped finance the widened deficit. But now the economy is returning to normal. Savings will reduce. A high fiscal deficit in these circumstances would simply be impossible to sustain. Who will the government borrow from? It will be wise to not borrow abroad at time of great global macroeconomic tumult when the same has not been attempted in calmer times. Borrowing at home will incur the risk of government borrowing crowding out private borrowers, delaying the revival of private investments, especially by tiny businesses.

Market worries over unfunded subsidies and tax credits is precisely what created the policy credibility crisis in the UK a few weeks ago, ultimately resulting in the departure of prime minister Liz Truss.

A budget with a conservative spending plan will also support the Reserve Bank of India’s fight against inflation. It will certainly help to demonstrate consistency – between the approaches of the fiscal and the monetary authorities and in the budgets year to year – when global macroeconomic policy spillovers are adding to uncertainty and risk for financial markets and investors.

The good news is that bringing the fiscal deficit to 6.4% in FY23 even after spending overshooting the budget’s projections may be less difficult than it seems. The budget makers must feel encouraged by the tax revenues recovering smartly from the covid shock. Collections this year so far from the GST and the direct taxes are cumulatively 3 lakh crore in excess of the budgeted targets. But disinvestment receipts are less than half the budget target of Rs. 65,000 crore.

There’s statistical relief too. High inflation this year also means that the nominal GDP — the denominator for the fiscal deficit ratio — will most certainly be higher than the 11.1% estimated in the budget. Reducing it from 6.4% to 4.5% of GDP in three years thereafter could take some serious belt-tightening and may require taking up expenditure reforms (long overdue anyway).

Keeping the fiscal deficit down may not prove to be excessively difficult but that does not mean it is a straightforward choice. There is considerable pressure on the finance minister to open the spending taps for supporting demand in the economy – so that the reduction in demand for exports (due to weakening global growth) can be made good.

Domestic demand isn’t as resilient as the post-covid pent-up spending/revenge spending visible in urban India suggests. Rural wages in real terms, i.e. accounting for inflation, have been shrinking for the last 10 months continuously, which has dampened rural consumption spending – affecting sales of two-wheelers, fast-moving consumer goods and other industries.

Worried, the industry has raised in consultations with the ministry, as it kicks of preparations for making the budget, demands for increased allocations to capital expenditure by 35%, taking the total public capex to about 10 trillion, with a special focus on rural infrastructure. Sanjiv Bajaj, chairman and managing director of Bajaj Finserv and president of lobby group Confederation of Indian Industry (CII), has called for a reduction in the rates of personal income tax. Lobbies also want the 15% corporation tax rate for new manufacturing units extended by another five years.

The elbow room for relief on income tax may be severely constrained. However, keeping the focus on the rural economy, with emphasis on building rural infrastructure, has merit. Had it been undertaken in this year’s budget, the demand conditions in the economy would have been more resilient. Direct support from the budget for tiny firms and the rural economy would have been a prudent response to the humanitarian crisis post-covid. The finance minister missed the bus last year.

While reducing the fiscal deficit in FY22, she had protected the budget’s capital spending, betting that it would crowd in private investment spending, spurring growth and jobs creation. The plan for the upcoming budget scheduled to be presented in February 2023 seems to be to do more of the same. This year that would be the correct policy approach.

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