A record high in India’s public debt-to-GDP ratio at 91.7%, a near doubling of the combined budget deficit following the pandemic by 12% on average, and worsening debt sustainability indicators in 2002 levels could be the root of fiscal conservatism, JM Financial said in a report.
However, we see more chances of moderating budget support from the Center and the States. GoI spending in proportion to budget estimates is already constrained to levels last seen during the peaks of the economic boom in FY07-08, the report said.
Thus, the Union budget for FY23 can bet strongly on the revival of the private sector as we saw after 2003, even if it targets conservative spending. The risk is that premature fiscal conservatism could prove counterproductive if the private sector does not recover sufficiently, according to the report.
FY22 budget management is stuck between extra expenditure of Rs 3 trillion on top of the budgeted Rs 34.8 billion (Free Food Scheme, Air India Royalties, Fertilizer Subsidy, MGNREGA, Export Arrears, etc.) of 5G auctions and a scenario where, despite the government’s repeated intention, the divestiture of BPCL and the IPO of LIC are not completed by the end of the financial year), the report states. .
While the extra spending would have meant a healthy 43% year-over-year increase in productive spending (i.e. taking into account the March 21 FCI loan repayment), chances are that all of that won’t happen. is not spent. This is because the Center’s expenditure is already lagging with FY22 (April-November 21) expenditure excluding interest payments (IP) growing modestly by 6.0% year-over-year . Thus, only 60% of the budgeted target has been spent so far, which is significantly lower than 70% in FY 2016-20 and almost equal to the levels seen during the boom times of the FY. 2007-2008, said JM Financial.
If indeed the budgetary inflows do not materialise, part of the additional Rs 3 tn can be subsumed in the overall expenditure budgeted by reductions in expenditure on certain components. Thus, the GoI fiscal deficit to GDP slippage for FY22 could be slightly higher by 10 to 20 basis points than the budgeted 6.8%. However, additional spending will still mean higher spending growth in the remaining months of FY22 than the 6% year-to-date.
Sustainability concerns may prompt the Indian government to lower the FD/GDP target to 6.4% in FY23.
Until the pandemic, the Center’s liability ratio was stable even as it rose for the states, thus keeping overall debt levels more or less constant. However, as a result of the pandemic, India’s combined public debt-to-GDP ratio rose to 91.7% (FY21), like its peers.
Central administration’s key passive indicators point to rising discomfort. Thus, given the fiscal conservatism already visible, we expect the Union budget to provide more detail on the pace of the future path of fiscal consolidation, the report says.
The FRBM law identifies debt sustainability with a DF/GDP target of 3%. However, in light of the pandemic shock, the Indian government adopted a major deviation in FY21/22 and guided the normalization of budget deficit to GDP at 4.5% by FY26.
In line with this objective, we expect the Union budget to target DF/GDP at 6.4% in FY23E from 7.0% in FY22E. The total expenditure budget for FY22E is expected to be about 10% higher than FY22E or Rs 39 tn. The focus should continue on rural India, health and capital spending. The budget deficit for FY23E is forecast at Rs 6.7 tn or 7.7% more than FY22E, according to the report.
JM Financial said the role of fiscal support will continue to be very crucial for India’s growth if the trajectory of private consumption and private investment remains on a modest recovery path. Therefore, the budgetary strategy of the Union budget should focus on supporting the demand side as opposed to the supply side.
Reviving the damaged informal sector and small businesses that create more jobs will be crucial.
Support for the real estate sectors, through fiscal measures, can also boost demand.
Better support for demand through sustained fiscal measures can eventually attract private investment, according to the report.
(Sanjeev Sharma can be contacted at [email protected])
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