Fall in India's nominal GDP expansion in FY24 to challenge fiscal math
India's nominal GDP growth is likely to fall in 2023-24, hurting tax collections and putting pressure on the federal government to reduce the budget gap by cutting expenses ahead of national elections in 2024. Nominal GDP growth, which includes inflation, is the benchmark used to estimate tax collections in the upcoming budget to be presented on Feb. 1. It is estimated to be around 15.4% for the current financial year.
At least four leading economists expect nominal GDP growth to come in between 8% and 11% as inflation slows and real GDP growth eases from an estimated 7% this year when pandemic-related distortions and pent-up demand pushed up growth rates. Lower tax revenue will limit the government's ability to spend and support the economy as the country heads to national elections in 2024. It will also strain efforts to bring down the fiscal deficit towards the medium-term target of 4.5% of GDP by 2025/26.
"Higher nominal GDP growth has not only helped in lowering public debt and fiscal ratios but has also resulted in pushing up credit growth to 16%-17% year-on-year in FY23," Deutsche Bank's chief India economist Kaushik Das wrote. Das said he expects nominal GDP growth of 8%-9% in FY24, with inflation and real GDP growth seen declining. A growth of 8-9% would bring that number close to the 7.6% nominal growth seen in 2019/20 before the Covid crisis hit.
As of November 2022, the federal government's net tax collection stood at Rs 12.24 lakh crore ($148.61 billion), 63% of the annual target. State Bank of India and rating agency ICRA estimates the nominal GDP growth at around 10% for the next financial year. This, according to ICRA Chief Economist Aditi Nayar, could translate into a growth of 9.4% in tax collections."We are slightly cautious on tax collections next year because we expect lower growth in collections of excise and customs duties," she said.
Bank of Baroda's chief economist, Madan Sabnavis, pegs nominal growth slightly higher at 11%-12% but still materially lower than the 15.4% this year. "The tax buoyancy seen this year due to inflation and pent-up demand will be missing this year," Sabnavis said. The fiscal deficit is seen at 6.4% of GDP despite higher nominal growth.
The Indian government had projected nominal GDP growth of 11.1% in the budget for 2022/23, significantly lower than the 15.4% now estimated by the statistical office in its first advance estimates released on Friday. This, according to BofA Global Research, could mean that the federal government's net tax collections surpass budget estimates by Rs 1.15 lakh crore. Non-tax revenues, including proceeds from disinvestment, will be lower though and spending will be higher by Rs 1.35 lakh crore.
"Higher-than-budgeted nominal GDP growth,(will help) to keep fiscal deficit as a percentage of GDP at 6.4%, with downside risks."
Economists at Kotak Institutional Equities, however, said the higher-than-budgeted nominal GDP growth could have allowed for the fiscal deficit to reduce to 6.1% of GDP, but higher spending will likely mean that the deficit stays at close to 6.4%. "For FY24, fiscal consolidation should remain limited to 30-40 bps from the current fiscal," said Soumya Kanti Ghosh, chief economist at State Bank of India. Other economists see scope for a quicker reduction of the fiscal deficit next year.
ICRA's Nayar pegs it at 5.8%, while Bank of Baroda's Sabnavis sees it at 5.75-6% of GDP. "While the nominal GDP growth rate is expected to be lower vs FY23, higher tax buoyancy, lower subsidy bill and targeted expenditure approach should pave way for lower fiscal deficit," said BofA Global Research, which also sees next year's deficit at 5.8% of GDP.
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