Budget 2022-23: Govt likely to target 13-14% nominal growth in FY23

A faster growth projection may cause inflation concerns, say officials

The Union Budget for FY23 is likely to assume 13-14 per cent nominal GDP growth despite the growing inflationary concerns. According to finance ministry officials, the assumption of even faster nominal GDP growth may raise inflationary expectations, giving wrong signals to the market.

For FY22, the Budget assumed 14.4 per cent gro­wth in nominal GDP. But the latest first Advance Esti­m­ates of GDP for the year released by the National Stati­stical Office put nominal GDP at 17.6 per cent, with an implicit GDP defl­ator of 8.4 per cent, signalling that the finance ministry might have underestimated nominal GDP gro­wth for the current fiscal year. The NSO uses a mix of inputs from the consumer price (CPI) and the wholesale price (WPI) indices to deflate nominal GDP to arrive at the real GDP value.

The Reserve Bank of India’s latest household survey showed inflation expectation rose to its highest since 2014 in November 2021. The median inflation expectation of households rose 20 basis points to 10.4 per cent in November, while the three-month and one-year ahead median inflation expectations saw a sharp rise of 150 basis points to 12.3 per cent and 170 basis points to 12.6 basis points, respectively, over the previous survey in September 2021.

“It would be imprudent to assume more than 13-14 per cent nominal GDP growth in FY23. Inflation is likely to be softer than FY22 and any exorbitantly high nominal GDP assumption may imply that we are signalling higher inflationary pressure in FY23,” said a senior finance ministry official.

Nominal GDP — the GDP that is evaluated at current market prices — factors in the effect of inflation and is used as the base to calculate key macroeconomic indicators, such as fiscal deficit, revenue deficit, and debt-to-GDP ratio.

A higher nominal GDP assumption makes it easier for the finance minister to show a narrower fiscal deficit print and vice versa. An analysis by Business Standard shows in the past 10 years, the Budget has overestimated nominal GDP eight times and underestimated nominal GDP only twice, including the ongoing FY22. The World Bank in its latest Global Economic Prospects upgraded its real GDP forecast for India to 8.7 per cent from the earlier 7.5 per cent for FY23, citing more investment from the private sector and in infrastructure, besides dividends from the ongoing reforms.  

The resurgence of the pandemic, higher food and energy prices, and supply disruptions have kept India’s inflationary pressure elevated. The wholesale price inflation rate remained in double digits for the ninth consecutive month in December, while retail inflation shot up to a five-month high of 5.6 per cent.

The International Monetary Fund in October said risks to India’s growth stem from higher global commodity prices and rising input costs, as evidenced by the recent increase in wholesale price inflation. “Elevated inflationary pressures need to be closely monitored, with implications for the growth-inflation trade-off. Looking forward, a well-communicated plan for a gradual reduction in the exceptional monetary policy support as the recovery strengthens, starting with the withdrawal of broad-based liquidity support and adjusting forward-looking communication, would foster orderly market transitions,” it added.