FY23 budget: Center unlikely to embark on a spending spree

The government is likely to refrain from significantly increasing fiscal spending in FY23 based on the Revised Estimate (ER) for that fiscal year, as it is wary of the potential cost of delaying fiscal rectitude for long after having been forced into a spending spree in recent years, sources told FE.

Given the high base, any increase in budget expenditure may not exceed 5-10% in FY23 on the BR for that FY (thus budget size may remain below Rs 40 lakh crore), although that nominal GDP is expected to grow by around 12.5%, one source said.

Nevertheless, the Center would put more emphasis on the quality of spending by pursuing its promise to strengthen budgetary investments. It will limit revenue spending, where possible, without cutting allocations for critical areas such as health and education, one of the sources said.

It can also reduce the benefit of certain centrally sponsored schemes when the outcome does not match the expenditure.

Even before the Covid outbreak, the government had to increase fiscal spending by up to 16.5% year on year in FY20 to Rs 26.9 lakh crore to sustain faltering growth. Then the pandemic hit, forcing it to increase spending by 30.5% to Rs 35.1 lakh crore to protect lives and livelihoods, despite a severe shortfall. The pace of spending therefore remained well above nominal GDP growth of only 7.8% in FY20 and -3% in FY21. Of course, there hasn’t really been a strict correlation between the pace of GDP expansion and the increase in the size of the budget – the latter is driven more by immediate demands.

While the government has targeted marginal spending cuts in FY22, it could end up exceeding the budget estimate by around Rs 2.4 lakh crore to Rs 37.2 lakh crore, up nearly 7% from the last financial year, in particular due to the inflation of food and fertilizer subsidies, according to an estimate by Icra.

Given that the Centre’s debt burden is expected to hit a 16-year high of nearly 62% of GDP at the end of this fiscal year (general government debt hovers around 90%) from less than 49% in the 20, sharply increasing spending in FY23 on a high base would be counterproductive, one of the sources said.

Soaring global commodity prices, high inflation and the specter of a faster US Federal Reserve cut could force the Reserve Bank of India to start tightening interest rates early next fiscal year, following its counterparts in advanced economies. In such an environment, fiscal policy should not run counter to monetary policy, another source said, indicating that the current spending spree cannot continue despite Covid constraints.

Similarly, if the Center were to achieve the stated target of reducing the budget deficit to 4.5% by FY26 from 6.8% in FY22, it will have no other choice. than resorting to strong consolidation in FY23, analysts said. This is partly because the 2024 general election could potentially slow the pace of reduction in the deficit ratio in FY24.

As for this financial year, the net tax revenue is expected to exceed the budget estimate by around Rs 2-2.5 lakh crore. But a likely shortfall from divestment proceeds and additional spending commitments would offset that gain and prevent the Center from sharply reducing the budget deficit in FY22 itself from the budgeted 6.8%, analysts said. .

Confirming its forecast for FY23, ICRA said the Center’s budget deficit could fall to 5.8% of GDP in the base case scenario where the impact of the current wave of Covid is limited to the March quarter. and no further waves in the next fiscal year. However, in the adverse scenario (moderate Covid wave in FY23), the deficit could reach 6.9% in the next fiscal year, he warned.

In the base case scenario, the planned discontinuation of GST compensation by the Center could lead to an increase in the budget deficit of the states to the level of the ceiling of 3.5% of their GDP, as set by the Fifteenth Finance Committee . As a result, the general government deficit would stand at around 9.3% of GDP in FY23, according to Icra.

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