Goldman Sachs expects India fiscal deficit to narrow to 5.9% in FY24

A recent report by Goldman Sachs should come as music to the ears of analysts and economists. According to Goldman Sachs, India should be able to hold its fiscal deficit (budget deficit) for the fiscal year FY23 at 6.4% as committed in the previous budget. Additionally, Goldman also believes that in the Union Budget announcement for FY23-24 on 01sts February 2023, the Finance Minister will announce a 50 bps reduction in the fiscal deficit to 5.(%. This would be an extremely aggressive and impressive glide path for the fiscal deficit, which had shot up to almost unmanageable levels during the pandemic. Several economists and rating agencies have been calling for quickly cutting fiscal deficit.

As per the Gold Sachs report, the current fiscal year FY23 could see an upside of 50 bps in the receipts side of the national accounts. This would be driven by higher nominal GDP driving greater tax buoyancy in the year. In addition, tax buoyancy is also being driven higher by a greater degree of formalization of the economy and better tax compliance, thanks to the robust use of technology to prevent tax leakages. However, Goldman Sachs has projected that the upside to expenditure could also be sharply higher by 80 basis points and this spike is likely to be largely driven by higher subsidies on food and fertilizers. A sharp spike in global prices of fertilizers and the massive free food program have been the reason.

One trend that is likely to continue in FY24 is the focus on capex and that is likely to be amply visible in the Union Budget 2023-24, according to Goldman Sachs. It expects the government to allocate 2.9% of GDP to capex in FY23-24, which is nearly 11% higher than the previous year in absolute terms. Of course, we still have to wait and see what Ms Nirmala Sitharaman actually announces on Budget day. One good news is that the food subsidy bill would gradually come down since the government plans to merge the free food scheme into the existing PDS system. But then food plus fertilizer subsidy would at least 1.3% of GDP, even in a best case scenario.

Where will the government work on bringing down the fiscal deficit. According to Goldman Sachs, the fuel subsidies under the Ujjwal Yojana are likely to remain at 0.1% and the total subsidy bill is likely to be at around 1.5% of GDP. This is sharply lower than Goldman’s own earlier estimates of 2.1% outlay for subsidies and that is likely to sharply tone down the fiscal deficit for FY24. However, Goldman also expects that the combined borrowings of the centre and the states is likely to be 10% higher than the previous estimates at Rs18 trillion. It remains to be seen where these borrowings go, in the face of falling fiscal deficit estimate.

Fiscal year FY23 is likely to gain from the higher nominal GDP in FY23. As per the first advance estimates put out by MOSPI on 07th January, the higher nominal GDP is likely to enhance the revenues of the government by Rs97,000 crore. This will allow the government to mee its 6.4% fiscal deficit target for FY23, despite higher subsidy allocations. It may be recollected that, earlier, the IMF had urged India to adopt a more ambitious fiscal consolidation roadmap, which the government had already been working on. IMF had then expressed concerns that any loosening of fiscal discipline in the Union Budgets could result in pressure on the Indian rupee as well as question marks over the sovereign ratings.

For India, the debt to GDP ratio has been steadily rising and for FY24, it is likely to inch up by 5 bps to 83.9% of GDP. India has already been apprised of the fact that it would have to take fiscal consolidation and fiscal discipline more seriously. The need of the hour is a more ambitious and well-communicated fiscal consolidation strategy. That would be a more sustainable scenario for the Indian economy. As per the IMF, announcing further deficit-reduction measures would reduce uncertainty and lower risk premia. If the Budget actually happens as per Goldman Sachs projections, rating agencies and foreign portfolio investors are likely to be mighty impressed.