Centre well placed for budget with falling inflation, rising revenues: EY

EY on Wednesday said India is well placed to achieve a credible fiscal consolidation glide path in the upcoming budget and achieve fiscal deficit target of 6.4% in FY23 on the back of falling inflation and rising tax revenues.

Pinning hopes on the high real and nominal GDP growth numbers of the current fiscal, EY hoped for a reduction of 1% in the fiscal deficit. The agency also said the government may focus on targeted subsidies and income support with policy emphasis on health and education services, along with infrastructure in the upcoming budget.

"With CPI inflation falling to 6.8% in October 2022 and GoI's gross tax revenues (GTR) growing by 17.6% during 1HFY23, government of India would be well placed to not only achieve the budgeted fiscal deficit target of 6.4% in FY23 but also spell out a credible fiscal consolidation glide path in the FY24 Budget," said EY in the monthly economy watch released on Tuesday.

"The FY24 Union Budget may also continue supporting the poor through well-targeted subsidies and income support with policy emphasis on health and education services, along with infrastructure expansion. These would help India effectively eliminate extreme poverty in the next few years while substantially reducing its multidimensional poverty," it added.

EY said the FY24 Budget may target a reduction in the government's fiscal deficit to GDP ratio by at least 1% point from the FY23 (BE). This may be feasible because of high real and nominal GDP growth in FY23 and in the medium term up to FY28 as indicated by the recent IMF forecasts, according to the agency.

"With respect to medium term growth prospects, it is important to signal a return to fiscal consolidation after the upsurge in the fiscal deficit to GDP ratio during the pandemic and the subsequent years. GoI's fiscal deficit was at 9.2% of GDP in FY21, and at 6.7% in FY22. In FY23, GoI is well-placed to adhere to the budgeted fiscal deficit level of 6.4% of GDP. However, these numbers imply that for three successive years, GoI’s fiscal deficit to GDP ratio was more than double the FRBMA (2018) target of 3%," EY said.  

Correspondingly, the debt-GDP ratio of the central government has also increased from 51% in FY20 to 61% in FY21, the agency pointed out in the report. "It is estimated at a high level of 58.5% in FY22 (RE) and 59% in FY23 (BE). This implies a higher interest payment to GDP ratio. The burden of interest payment would be high both because of the pressure on interest rate and relatively higher debt levels," it added.  

"In order to create fiscal space for the future, it is important for the FY24 Union  Budget to target a reduction of at least 1% point as compared to the FY23 budgeted fiscal deficit. Alongside, the central government may lay out a credible glide path for reducing its fiscal deficit and debt relative to GDP. This would facilitate maintaining a robust medium-term growth for the Indian economy along with improved fiscal room for supporting growth," EY said.