India will have to cut spending due to budget deficit in 2024
2023.01.09 05:48
India will have to cut spending due to budget deficit in 2024
Budrigannews.com – In the years 2023 and 2024, India’s nominal GDP growth is likely to slow, which will hurt tax collections and put pressure on the federal government to close the budget gap by cutting costs before the 2024 national elections.
In the upcoming budget, which will be presented on Feb. 1, the benchmark used to estimate tax collections is nominal GDP growth, which includes inflation. For the upcoming fiscal year, it is anticipated to be around 15.4%.
As inflation slows and real GDP growth slows from an estimated 7% this year, when pandemic-related distortions and pent-up demand pushed up growth rates, at least four leading economists anticipate nominal GDP growth between 8% and 11%.
As the nation prepares for national elections in 2024, the government’s ability to spend money and support the economy will be limited by lower tax revenue. Additionally, it will put a strain on efforts to reduce the fiscal deficit to the medium-term goal of 4.5 percent of GDP by 2025/26.
“Higher nominal GDP growth has not only helped to lower public debt and fiscal ratios, but it has also resulted in pushing up credit growth to 16%-17% year-on-year in FY23,” Deutsche Bank (ETR:) projects nominal GDP growth at 15.4% in 2022/23. Kaushik Das, chief India economist, wrote in a note on Monday.
Das stated that he anticipates nominal GDP growth of 8 to 9 percent in FY24, with declining inflation and real GDP growth. That number would be close to the nominal growth of 7.6% seen in 2019–20, prior to the Covid crisis, with a growth rate of 8–9%.
The federal government had collected 12.24 trillion rupees ($148.61 billion) in net taxes as of November 2022, which was 63% of the annual target.
The State Bank of India and the rating agency ICRA predict that the next fiscal year’s nominal GDP growth will be around 10%. Aditi Nayar, Chief Economist of the ICRA, asserts that this could result in a 9.4% increase in tax collections.
She stated, “We expect lower growth in collections of excise and customs duties” and “we are slightly cautious on tax collections next year.”
Madan Sabnavis, chief economist at the Bank of Baroda, projects nominal growth at between 11 and 12 percent, which is still significantly lower than this year’s 15.4%.
Sabnavis stated, “The tax buoyancy seen this year due to inflation and pent-up demand will not be present this year.”
Despite higher nominal growth, India’s fiscal deficit stands at 6.4% of GDP. The Indian government had projected nominal GDP growth of 11.1% in the budget for 2022/23, which was significantly lower than the 15.4% that the statistical office now estimates in its first advance estimates, which were released on Friday.
BofA Global Research suggests that this could indicate that the federal government’s net tax collections exceed budget projections by 1.15 trillion rupees.
However, spending will rise by 1.35 trillion rupees and non-tax revenues, including disinvestment proceeds, will decrease.
It stated, “With downside risks, higher-than-budgeted nominal GDP growth (will help) to keep the fiscal deficit as a percentage of GDP at 6.4 percent.”
However, economists at Kotak Institutional Equities stated that although higher spending will likely keep the deficit close to 6.4%, the higher-than-expected nominal GDP growth could have reduced the deficit to 6.1% of GDP.
Soumya Kanti Ghosh, chief economist at the State Bank of India, stated that “fiscal consolidation should remain limited to 30-40 bps from the current fiscal” for the fiscal year that follows.
Other economists believe that the fiscal deficit could be reduced more quickly in the coming year.
It is estimated to be between 5.75 and 6% of GDP by Sabnavis of the Bank of Baroda and Nayar of the ICRA.
More Government can’t handle stranded ship in Suez Canal
According to BofA Global Research, which predicts a deficit of 5.8% of GDP for the following year as well, “higher tax buoyancy, lower subsidy bill, and targeted expenditure approach should pave the way for lower fiscal deficit” despite the fact that a lower nominal GDP growth rate is anticipated in comparison to FY23.
