Capital outlay should support a higher pace of GDP expansion in FY22

The Union Budget for FY2022 has been presented as India and the world attempt to exit the clutches of the Covid-19 pandemic. Today's Budget speech was announcement-packed, prioritising health and infrastructure, and delivered to a large extent on the extraordinarily elevated expectations. Nevertheless, timely implementation of the myriad proposals holds the key for sustaining the incipient growth revival that in underway in H2 FY2021, and helping the economy attain a higher growth trajectory over the medium term.

In its Budget Estimates (BE) for FY2021, released in February 2020, the Government of India (GoI) had pegged its fiscal deficit at Rs 8 trillion (3.5 per cent of GDP) based on the assumption that the nominal GDP for FY2021 would be Rs 224.9 trillion. The Revised Estimates (RE) for FY2021 have indicated that the fiscal deficit would exceed the BE by a substantial Rs 10.5 trillion, led by the downward revision in tax revenue and disinvestment receipts, as well as upward revisions in expenditure, a large part of which is related to the higher allocation of food subsidy towards the Food Corporation of India.

Moreover, the nominal GDP for FY2021 has been revised down to Rs 194.8 trillion, following the recession brought on by the pandemic. As a result, the fiscal deficit of the GoI has increased sharply to 9.5 per cent of GDP in the RE for FY2021, relative to the budgeted target of 3.5 per cent.

The BE for FY2022 indicates a decrease in the fiscal deficit in absolute terms, to Rs 15.1 trillion from Rs 18.5 trillion in the RE for FY2021. Similarly, as a percentage of GDP, the fiscal deficit is estimated to narrow to 6.8 per cent in the BE for FY2022, from 9.5 per cent of GDP in the RE for FY2021. However, this exceeds our projection, on account of capital spending and food subsidy.

The estimates made for net tax revenues and non-tax revenues in FY21 RE and FY22 BE, are broadly in line with our estimates. The expansion of 14.9 per cent and 15.4 per cent, respectively, projected in the FY22 BE for net tax revenues and non-tax revenues appear to be credible, and in line with expected nominal GDP growth of 14-15 per cent. After the large miss in FY21, whether the ambitious disinvestment target for FY22 can be achieved, will depend on the completion of the planned transactions in a timely manner.

Based on the FY21 RE, we assess that overall expenditure is set to more-than-double in Q4 FY21, driven by the back-ended release of food subsidies. Moreover, the capital outlay included in the BE for FY22, exceeds our forecast, and should support a higher pace of GDP expansion in FY22.

The Union Budget for FY22 indicates a massive, but unavoidable slippage of 600 bps and 350 bps, respectively, relative to the previously announced targets of 3.5 per cent of GDP and 3.3 per cent of GDP, respectively, for FY21 and FY22. Additionally, the glide path for the correction in the GoI’s fiscal deficit appears to be back-ended, and more modest than expected.

(Aditi Nayar, Principal Economist, ICRA. Views expressed are personal.)