Centre's GDP deflator forecast for FY23 is 3-3.5%: FM Nirmala Sitharaman

Finance Minister Nirmala Sitharaman said on Thursday that the Centre’s gross domestic product (GDP) deflator projection for 2022-23 is 3 to 3.5 per cent. This means that the government’s own real GDP growth projection for the coming fiscal year is in the range of 7.6-8.1 per cent, given that the Union Budget assumes a nominal GDP growth rate of 11.1 per cent for FY23.

GDP deflator, or implicit price deflator, is a measure of inflation and is the difference between nominal GDP and real GDP.

“Our GDP projection in the Budget is based on the advance estimates of the National Statistical Office. One should recall that the advance estimates were prior to the Omicron wave. In our assumptions, we have also taken the third wave into consideration. Therefore, our nominal GDP estimate is 11.1 per cent. We expect a deflator of 3 to 3.5 percent in FY23,” Sitharaman said in the Lok Sabha while replying to the debate on the Union Budget.

The Budget does not give real GDP estimates. The Economic Survey 2021-22, drafted by Principal Economic Advisor Sanjeev Sanyal, projected a real GDP growth rate of 8-8.5 per cent for FY23. The Centre considers the Survey’s estimates a tad too optimistic.

Based on Sitharaman’s statement, the finance ministry’s own real GDP projection is closer to that of the Reserve Bank of India. The central bank on Thursday projected real GDP growth of 7.8 per cent in FY23. Interestingly, it projected retail inflation of 4.5 per cent for next year.

A deflator takes from both wholesale and retail inflation. WPI inflation has been in double digits this year. “Typically there is what is called reversion to the mean. That is, if WPI is very high this year, and higher than CPI, then it usually tends to be lower than CPI next year. It doesn't always happen. But it's a reasonable assumption. So if we have a reversion of the GDP deflator, next year it could be lower than CPI,” Finance Secretary TV Somanathan had told Business Standard last week.

Speaking on other Budget-related issues in the Lok Sabha, Sitharaman said the Modi government had controlled revenue expenditure and expanded capital expenditure as the latter had a greater multiplier effect.

“For every rupee you spend in revenue expenditure, the multiplier is 45 paise. For every rupee you spend in capital expenditure, the multiplier is Rs 2.45. Revenue deficit has shown a visible decline because it does not give us the multiplier that we want. It is difficult to reduce revenue expenditure, but we have shown it can be done without causing much upheaval,” she said.

Sitharaman also assured that if there is demand, the Centre will provide more funds for the flagship National Rural Employment Guarantee Scheme through supplementary demand for grants.