Consolidation demands

The fiscal picture could get complex

The Reserve Bank of India (RBI) board last week decided to transfer a Rs 87,416-crore surplus for 2022-23 to the Government of India. The government had budgeted for Rs 48,000 crore as surplus from the RBI, state-owned banks, and financial institutions. The surplus is almost three times what the central bank transferred for 2021-22, though it accounted for only nine months because of the change in the RBI’s accounting year. The surplus is estimated to have been pushed by the central bank’s foreign currency market operations. Since the RBI has decided to transfer 82 per cent more than the budgeted amount under the given head, other things being equal, it should help the government reduce the fiscal deficit from the budgeted 5.9 per cent of gross domestic product (GDP). As the state-run banks are doing well, the inflow under this head could be significantly higher by the end of the year.

However, there are various other moving parts that would also shape actual fiscal outcomes during the year. For instance, as reported by this newspaper last week, the government may not undertake any new disinvestment or privatisation this fiscal year, and the programme is likely to resume only after the 2024 Lok Sabha elections. The government had budgeted for Rs 51,000 crore from disinvestment in 2023-24. Even if some minor stake sale is undertaken during the year, the government can be expected to fall short of the target significantly. Further, on the tax revenue front, some economists expect the collection to come under pressure because of lower inflation. Notably, the inflation rate based on the wholesale price index has gone into negative territory after averaging over 9.5 per cent in 2022-23. A recent note from IDFC FIRST Bank, for instance, underscored that nominal GDP growth during the current year could be about 9 per cent as against the 10.5 per cent assumed in the Union Budget.

On the expenditure side, fertiliser subsidy is again expected to overshoot the budgeted target. Uncertainty over the monsoon could also increase demands on the Budget. Besides, given that a number of crucial Assembly elections are due this year, leading up to the Lok Sabha elections in 2024, the government can be expected to increase expenditure in select areas. Although these are still early days in the fiscal year, a sharp decline in nominal growth could itself make the fiscal-deficit target difficult to achieve. It is important to note that the actual fiscal performance during the current year would also have a bearing on the medium-term target. The government has committed itself to bringing down the fiscal deficit to below 4.5 per cent of GDP by 2025-26.

This implicitly means a fiscal correction of 0.7 percentage points per year over the next two years. It would evidently become difficult if the government is not able to attain a correction of 0.5 percentage points this fiscal year. Global growth is likely to remain soft in the medium term, which would affect India’s prospects and make fiscal correction more demanding. Although the medium-term target of 4.5 per cent of GDP is itself high, the need for consistent consolidation over the next several years cannot be overstated. India’s higher public debt and general government deficit would keep interest payments elevated and affect the government’s ability to support growth through higher capital expenditure.