As nominal GDP growth may decrease in FY24 as a result of the global economic slowdown, the forthcoming budget might be a difficult task for the government to strike a balance between expenditure and fiscal responsibility.
In Brief
A expected slowdown in nominal GDP growth might make the government’s spending priorities more difficult in the 2019 budget.
The standard for estimating tax receipts in the forthcoming budget to be presented on February 1 is nominal GDP growth, which takes inflation into account.
As inflation declines, at least four prominent economists predict that nominal GDP growth will be between 8% and 11%.
via Reuters In 2023 and 2024, India’s nominal GDP growth is anticipated to slow, which would damage tax revenues and put pressure on the federal government to close the budget gap by reducing spending before the country’s 2024 elections.
The benchmark used to project tax receipts in the forthcoming budget, which will be published on February 1, 2023, is nominal GDP growth, which takes inflation into account. For the current fiscal year, it is predicted to be approximately 15.4%.
As inflation moderates and real GDP growth falls from an expected 7% this year, when pandemic-related distortions and pent-up demand drove growth rates higher, at least four prominent economists predict nominal GDP growth to be between 8% and 11%.
The government’s capacity to spend and stimulate the economy as the nation prepares for national elections in 2024 will be constrained by decreased tax revenues. Additionally, it will make it more difficult to reduce the budget deficit to the medium-term goal of 4.5% of GDP by 2025–2026.
The chief economist for India at Deutsche Bank, Kaushik Das, said in a note on Monday that “higher nominal GDP growth has not only helped in decreasing public debt and fiscal ratios, but has also resulted in driving up credit growth to 16%-17% year-on-year in FY23.”
Inflation and real GDP growth are expected to be dropping, according to Das, who anticipates nominal GDP growth of 8% to 9% in FY24. With an increase of 8–9%, the figure would be quite similar to the 7.6% nominal growth recorded in 2019–20, before to the Covid issue.
The federal government collected 12.24 trillion rupees ($148.61 billion) in net taxes as of November 2022, or 63% of the yearly goal.
The nominal GDP growth for the next fiscal year is predicted to be around 10% by the State Bank of India and rating agency ICRA. ICRA Chief Economist Aditi Nayar estimates that this might result in an increase in tax revenue of 9.4%.
Because we anticipate slower increase in excise and customs duty collections, she added, “we are little apprehensive” about tax revenues in the upcoming year.
Madan Sabnavis, the chief economist of Bank of Baroda, forecasts nominal growth at 11% to 12%, which is still noticeably below this year’s 15.4%.
According to Sabnavis, “the tax buoyancy witnessed this year owing to inflation and pent-up demand would not be present this year.”
In its budget for 2022–2023, the Indian government predicted nominal GDP growth of 11.1%, far lower than the 15.4% presently forecast by the statistics office in its first advance estimates published on Friday.
This might imply that the federal government’s net tax receipts exceed budget expectations by 1.15 trillion rupees, according to BofA Global Research.
While spending would increase by 1.35 trillion rupees, non-tax receipts, including the benefits from disinvestment, will be lower.
It stated that “downside risks exist” and that “higher-than-budgeted nominal GDP growth, (will assist) to keep fiscal deficit as a percentage of GDP at 6.4%.”
However, economists at Kotak Institutional Equities stated that despite better-than-anticipated nominal GDP growth, the fiscal deficit is projected to remain at or near 6.4% of GDP due to greater expenditure.
Soumya Kanti Ghosh, chief economist of State Bank of India, stated that budget consolidation for FY24 “should stay restricted to 30-40 bps from the current fiscal.”
Other analysts believe that the budget deficit can be reduced more quickly in the upcoming year.
Bank of Baroda’s Sabnavis estimates it at 5.75–6% of GDP, whilst ICRA’s Nayar puts it at 5.8%.
BofA Global Research, which also forecasts a 5.8% GDP deficit for 2019: “While nominal GDP growth rate is likely to be lower versus FY23, stronger tax buoyancy, lower subsidy bill, and focused expenditure strategy should pave way for smaller fiscal deficit.”
