Budget 2023: Will India walk the talk on fiscal prudence?

Finance Minister Nirmala Sitharaman is set to present the Union Budget come February 1, 2023. With the Centre set to over-achieve its receipts in FY23, all eyes are set on whether the Narendra Modi government can strengthen its desire for fiscal consolidation.

The fiscal deficit was pegged at about Rs 16.61 lakh crore in BE 2022-23, which was 6.4% of the GDP. A fiscal deficit is an indicator of the government’s market borrowing

Analysts noted that the Centre has been extremely conservative in its receipt estimates for the second straight year.

“The Centre is likely to over-achieve its receipts in FY23, allowing it to meet higher-than-budgeted spending without breaching its fiscal deficit targets. It does not suggest that the CG has improved in its forecasting ability, but that it has shifted to being conservative from an overambitious entity,” said Motilal Oswal in a report to clients.

The Finance Ministry in its report on December 20 said that the Budget 2022-23 envisioned a stronger commitment towards capital expenditure along with keeping fiscal consolidation in sight, it said, adding, the Government of India (GoI) adopted a more calibrated fiscal path to strike a balance between growth and fiscal consolidation.

With regard to fiscal deficit, the finance minister at the Lok Sabha said the government would be able to meet the fiscal deficit target of 6.4 per cent of the GDP for the current financial year.

The government is committed to the path of fiscal consolidation, she added.
The World Bank in its latest report said that the Centre is on track to meet its fiscal deficit target of 6.4% of the GDP for FY23 on the back of strong growth in revenue collections. High nominal GDP growth in the first quarter supported strong growth in revenue collection, especially Goods and Services Tax (GST), despite tax cuts on fuel.

India’s fiscal deficit touched 37.3% of the annual target in H1FY23, above the 35% of the same half last year.

General elections 2024: More spending ahead?


India goes to general elections in 2024. Budget 2023 is expected to be the last full Budget of the Modi government in its second term and there are mixed expectations of populist schemes in the year ahead.

The Centre wants to achieve a deficit of 4.5% by FY26.

“We don’t expect the Centre to announce any new populist schemes in this Budget. We hope the Pradhan Mantri Garib Kalyan Yojana (PMGKY) is not extended beyond December 2022. However, if the CG is serious about achieving a deficit of 4.5% in FY26, it must reduce the same to 5.6-5.8% of GDP in FY24,” said Motilal Oswal.

India’s fiscal deficit shot up to a record 9.3% in 2020/21, from 4.6% the previous year due to pandemic-related spending.

“If so, our calculations suggest that with around 11% growth in receipts, total spending will have to grow by 6-8% in FY24. It would also mean that the GoI will have to consolidate its deficit by another 0.6pp of GDP each in the next two years,” Motilal Oswal added.

Pricing in some sort of a populist budget, Tanvee Gupta Jain of UBS Securities expects the government to go slow on fiscal consolidation and target the fiscal deficit at 5.9% in FY24 (from 6.4 per cent in FY23) as she sees the public capex push continuing towards boosting rural/welfare spending.

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