FM armed with strong fiscal ammunition to spur growth

By: Ranen Banerjee, Partner and Leader - Economic Advisory Services, PwC India

An analysis of the monthly revenue trends of the Central Government for FY22 up to the month of November and a comparison with the average revenue up to November from FY16 to FY20 (skipping FY21 due to severe COVID-related impact) reveals that the revenue receipts of the Union Government are likely to exceed budget estimates by INR 6.4 trillion. On the other hand, the non-debt capital receipts (primarily asset monetisation and disinvestment proceeds) till November have been a meagre 0.2 trillion against the annual budgeted estimate of INR 1.9 trillion. The pace of disinvestment suggests that the Union Government may be able to process not more than INR 0.5 trillion from this head, thus falling short by about INR 1.4 trillion. We therefore estimate that the total revenues for the Union Government are likely to exceed the budget estimates by approximately INR 5 trillion in FY22.

Perhaps realising this, Government has sought approval for additional spending through a supplementary demand for grants with a net cash outgo of approximately INR 3 trillion. This additional spending is focused on retiring the short-term liabilities and clearing off payment dues, including equity infusion into the company that holds residual assets and liabilities of Air India, payment of pending export incentives and a transfer to the National Rural Employment Guarantee Fund.

The Finance Minister will thus have a choice of either spending this estimated excess revenue of around INR 2 trillion (balance after the supplementary provision of INR 3 trillion already made) and keep the fiscal deficit at the budgeted level of 6.8% or to report a lower fiscal deficit of close to one percentage point. Our preference will be for the FM to stick to the budgeted fiscal deficit level and use the excess revenues to give a further thrust to consumption, investment and credit creation flowing into FY23.

The absorption of excess revenues in a very short time period is challenging. However, the Government could explore utilising this additional fiscal capacity to (1) recapitalise public sector banks, allowing them more lending capacity in FY23; (2) additionally allocate to the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) to help boost employment and consumption in rural areas; and (3) clear pending bill payments on capital projects at advanced stages of development to speed up project completion and also push cash into the system and bring down the working capital requirements of construction companies and contractors. In addition, the Government could also explore paying off some of its off-budget liabilities to clean up its balance sheet, which will be viewed positively by rating agencies.

We have estimated that if the Government does not spend the additional revenue available during the current year, then the fiscal deficit will reduce to around 5.8% of the GDP compared to the 6.8% projected in the budget. This could put pressure on the budget for FY23 to show further fiscal consolidation with deficit numbers below what are projected to be achieved for FY22, constraining the Government’s spending capacity.

If the projected revenues for FY22 as per our model (refer to the table below) are achieved and based on the assumption in our fiscal model, we estimate that the total non-debt receipts of the Central Government could be around INR 29.6 trillion in FY23 or INR 9.8 trillion higher than FY22 BE. The key assumptions in our model are an improvement in the tax to GDP ratio based on tax efficiency gains, 13% growth in nominal GDP, trend growth in non-tax revenue and additional INR 1 trillion from disinvestment receipts. Assuming 10% growth in budgeted expenditure, Government expenditure is estimated to be INR 38.3 trillion for FY23. Further, to achieve a fiscal deficit of 4.5% by FY26 through an equally distributed fiscal consolidation path, the fiscal deficit for FY23 has been pegged at 6.2% of the GDP. This will allow a borrowing capacity of INR 16.3 trillion, providing a net additional spending headroom of INR 7.6 trillion to the Government for FY23. This additional revenue can be gainfully deployed for large infrastructure projects to boost employment and productivity and for supporting the poor and vulnerable population through the MGNREGS and other social security schemes.

Table 1: PwC’s estimation of Central Government revenue and fiscal deficit for FY23