Budget 2023: A Step Towards Fiscal Consolidation And Reduction In Fiscal Deficit

Nirmala Sitharaman has addressed all the aspects through increased spending on capital expenditure and keeping fiscal deficit target below 50 bps for FY24

Finance Minister Nirmala Sitharaman presents her fifth and the first budget of Amrit Kal on February 1, with a hope to build on the foundation laid in the previous Budget and the blueprint drawn for India@100. She had to address several challenges through the Budget. Where she had to focus on increasing the spending on capital expenditure to sustain the growth, she had to follow the path of fiscal consolidation and reduce fiscal deficit.

Apart from this, since this is the last full Budget of the Modi government 2.0 and this government has to go for the general election in 2024, then a populist Budget had to be made. However, the budget-2023 is an effort to satisfy most strata of the society and market as well.

The finance minister has addressed all the aspects through increased spending on capital expenditure and keeping fiscal deficit target below 50 bps for FY24. FM has increased capital expenditure by 33 percent to Rs 10 lakh crore in FY24. This is 3.3 per cent of the GDP. FM stayed on the fiscal consolidation path. The government pegged the fiscal deficit target at 5.9 per cent of the GDP for FY24.

Finance Minister Nirmala Sitharaman reiterates her commitment to bring down the fiscal deficit to below 4.5 percent of GDP by the financial year 2025-26. Fiscal deficit is a difference between the revenue receipts and non-debt capital receipts and the total expenditure. The government has set a fiscal deficit annual budget estimate of Rs 17.87 lakh crore to keep fiscal consolidation on track. The total annual estimate of expenditure is Rs 45.03 lakh crore in FY24 against the total revenue other than borrowing of Rs 27.2 lakh crore.

The net tax receipts are estimated at Rs 23.3 lakh crore. It is 21 percent higher than the annual budget estimate of Rs 19.3 lakh crore in FY23. The fiscal deficit will be financed by a well calibrated borrowing plan. The government’s net market borrowings of Rs 11.8 lakh crore will be from dated securities. The rest financing is expected from small savings and other sources. The gross market borrowings are estimated at Rs 15.4 lakh crore.

Fiscal mathematics of FY23

Even the fiscal deficit target in terms of amount has increased by 0.94 lakh crore – from Rs 16.61 lakh crore to Rs 17.55 lakh crore in FY23. The government, however, adhered to its fiscal deficit target of 6.4 percent of GDP in revised estimate for FY23. The fiscal deficit seems to be under the control of the government and expected to see progressive reduction in the next three financial years.

The revised estimate of the total receipts of Rs 24.3 lakh crore and total expenditure is Rs 41.9 lakh crore for FY23. Despite the rise in capital expenditure, the buoyancy in tax revenue, an increased savings and improved GDP number, allowed the government to control the fiscal deficit. The revised estimate of net tax is Rs 20.9 lakh crore against the annual budget estimate of Rs 19.3 lakh crore. Saving with reference to GDP, which stood at 0.7 percent gives leverage to the government to increase expenditure and reduce fiscal deficit.

The 1st advance estimate of GDP released by the Ministry of Statistics and Programme Implementation has also given a room for additional spending of Rs 0.97 lakh crore – {6.4% of (Rs 273.08 lakh crore – Rs 258 lakh crore)} in the current fiscal without tinkering with fiscal mathematics. Nominal GDP at current prices is projected at Rs 301.75 lakh crore for FY24 against the FAE of Rs 273.08 lakh crore  and the annual budget estimate of 2022 Rs 258 lakh crore for FY23.

Fiscal deficit of states

The centre government is focusing on capital expenditure to create demand, generate employment, and boost growth. States are also being asked to spend on capital expenditure. The centre is offering a fifty years interest free loan to states. The loan amount has to be spent on capital expenditure within 2023-24.

Most of this will be at the discretion of states, however, a part will be conditional on states increasing their actual expenditure. To continue the path of fiscal consolidation, Budget-2023 allows states a fiscal deficit of 3.5 percent of Gross State Domestic Product (GSDP) of which 0.5 percent will be tied to power sector reform.

Move toward fiscal consolidation

The finance minister in her budget for 2021-22 had announced that the government plans to continue the path of fiscal consolidation. The government intends to bring the fiscal deficit below 4.5 percent of GDP by 2024-25. The budget 2023 is on the same path with a fairly steady decline over the period. The global rating agency Moody states that the budget-2023 of India keeps fiscal consolidation intact and will help stabilise the government’s debt burden relative to nominal GDP.

However, the rating agency warns India and said the lower fiscal deficit underscores the commitment of the government to long term fiscal sustainability. The agency is of the view that the high debt burden with a weak debt affordability remain key constraints that nullify fundamental strength of the country.

Dr Vinay K Srivastava teaches at ITS Ghaziabad

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