New Delhi: In the upcoming Union Budget, the Center will, as always, make prudent promises about keeping its finances under control. But this time striking the right balance will not be easy. For one, the 2024 Lok Sabha elections are round the corner, and the political temptation to spend would be unacceptable. A possible slower economic growth next year won’t help either, and higher tax revenues can’t be taken lightly. All of this makes budgeting a challenging exercise.
In 2022-23, finances have remained well on track, with fuel duty cuts and little loss from higher subsidy spending. In fact the Centre’s bill on key subsidies had reached 95% of the full year’s budget by November, and analysts believe it is far exceeding the target 2.5 trillion by the end of the year. But revenue momentum has been maintained. that may also be overestimated 1.8 trillion.
Additional relaxation is observed from healthy growth. In the previous budget, the fiscal deficit for 2022-23 was calculated—the extent to which expenditure exceeds revenue— 16.6 trillion, or 6.4% of GDP. But that was when the Center believed that nominal GDP would grow by 11.1%. That has changed: A fresh estimate released on Friday predicts growth of 15.4%, meaning the Center may meet its 6.4% promise, even as the fiscal deficit nearly exceeds the target 0.9 trillion.
At least for this year, it spells a clear ability to spend within means, even as the going forward 7.5 trillion capital expenditure target. But the story will change in 2023-24.
fiscal hole
In its budget on February 1, the Center may set its fiscal deficit target for 2023-24 at 6% of GDP, but this may be difficult to achieve due to fiscal pressures arising 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 top up their entitlement of subsidized food grains. With the pandemic under control, the Center was expected to shelve the scheme soon. And last month it did just that – but also replaced an existing subsidized food scheme with one for free for a year. Critics say that this will give electoral advantage. Nomura said in a recent note that the restructuring would save government money 0.6-0.7% of GDP, but it also stands to lose revenue it could have made from subsidized food sales.
Meanwhile, the government may also need to continue with robust capital expenditure to support slower growth, which will bring challenges of its own. Analysts forecast nominal GDP growth of around 11% in 2023-24, may have to reduce fiscal deficit This should account for 6.2% of the 18.8 trillion GDP, and Mint’s calculations show that 18.2 trillion would come down to 6% for this.
According to economists, a sharp increase in revenue expenditure is unlikely to be announced in the budget itself. But an expected growth moderation, rural distress and external uncertainties could mean that by this time next year, the Center may be forced to spend more than it has budgeted. (This year too, apart from additional grants on food and fertilizer subsidies, the government has sought Parliament’s nod to spend more for rural areas.)
tax trends
Strong tax collections this year have helped offset some unexpected spending, which came in the form of a cut in excise duty on fuel and a higher subsidy bill following a sharp rise in prices as a result of the Russia-Ukraine war. However, a closer look at the numbers reveals that the government may have underestimated its gross tax collection in the first place. estimated budget 27.6 trillion in gross tax collections, but had earned 65% of this by November, the latest month with available data.
Even in 2021-22, the actual tax collection has almost outpaced the revised estimate 2 trillion. This is a reversal of the earlier trend, when the government projected a tax mo-up (and underachievement) between 2018-19 and 2020-21. This caused fiscal pressure by the end of the year. With growth slowing in 2023-24, the sharp rise in tax collections so far could also weaken, and if the government chooses to stick to conservative tax targets, this could limit the scope for more announcements in the Budget itself. Which economists said should be closely watched for the electoral soap.
Goods and Services Tax (GST) collections have been the largest contributor to gross tax revenue for the past three years (2.9% of GDP in 2021-22), surpassing corporate tax collections in 2019-20, when the corporate tax cut was announced.
Analysts forecast nominal GDP growth of around 11% in 2023-24, may have to reduce fiscal deficit This should account for 6.2% of the 18.8 trillion GDP, and Mint’s calculations show that 18.2 trillion would come down to 6% for this. The Center aims to reduce the fiscal deficit to 4.5% by 2025-26.
The strong GST collection this year has also been a big boost for the government’s coffers. However, the higher revenue through indirect tax collection has been criticized by many policymakers and economists as it places undue burden on poor Indians who are already battling high inflation and may prove detrimental to revival in consumption. Huh.
The government is again facing an incredible fiscal crunch.
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