Lower-than-anticipated nominal gross domestic product (GDP) in FY24, as pegged in the first advance estimate, will make it harder for the Centre to realise its targeted 5.9% fiscal deficit ratio, as it now has to either squeeze its spending by about Rs 37,000 crore or raise its revenue mop-up accordingly from the budgeted levels.
The nominal GDP for FY24 is now estimated at Rs 296,57,745 crore, which is up 8.9% from a year before but it’s lower than the budgeted Rs 301,75,065 crore. So, the government will have to contain its fiscal deficit, in absolute terms, at Rs 17,49,807 crore in FY24, against the budgeted Rs 17,86,816 crore to be able to meet the 5.9% deficit target relative to nominal GDP.
If the government keeps the fiscal deficit at 5.94% of GDP (which would still be accounted as 5.9% of GDP), the difference from the bidgetted deficit level would be about Rs 25,000 crore.
To be sure, senior finance ministry officials had exuded confidence that the government would meet the deficit ratio even if the nominal GDP falters a bit, thanks to robust tax collection and prudent spending.
But given the lower nominal GDP, India Ratings chief economist DK Pant and ICRA chief economist Aditi Nayar now expect the FY24 fiscal deficit to slightly breach the target and hit 6% of GDP.
“Higher-than-budgeted revenue expenditure triggered through the first and likely second supplementary demand for grants in combination with lower-than-budgeted nominal GDP will push the fiscal deficit to 6% of GDP,” Pant said.
In the first batch of supplementary demands for grants for FY24, the government had got parliamentary approval for an extra net spending of Rs 58,378 crore.
Importantly, the Centre’s fiscal deficit in the first eight months of this fiscal year hit only 50.7% of the annual target, against 58.9% a year before, as a tight leash on spending in recent months on top of improved tax collections kept the deficit under control.
The government’s net tax revenue until November grew 17.2% from a year before, higher than the targeted 11.1% expansion. Similarly, non-tax revenue growth hit 43.4%, way above the budgeted 5.4%.
Government officials have also indicated lower utilisation of capex assistance extended to states (by at least Rs 30,000 crore from the budgeted Rs 1.30 lakh crore), partly due to upcoming elections.
Importantly, the statistics ministry has projected a 7.3% real GDP growth rate for FY24, which beats nearly all estimates and way above the 6.3% predicted by the International Monetary Fund. However, nominal growth fell short of the budgeted 10.5% (10.8% after the base revision), as inflation based on the wholesale price index (WPI) remained mostly in the negative zone. The WPI plays a dominant role in determining the deflator that is used to differentiate between nominal and real GDP growth rates.