ICRA expects govt to miss disinvestment target; fiscal deficit to correct to 10.4% in FY22

• The net tax revenue gains to the GoI would be nullified by the expected large miss on receipts from disinvestment and back-ended spending, said ICRA
• In the base case for FY2023, ICRA sees the GoI's fiscal deficit moderating to Rs 15.2 trillion or 5.8 percent of the GDP

New Delhi: A miss in achieving the PSU disinvestment target is likely to cause the Centre's fiscal deficit to print at Rs 16.6 trillion or 7.1 percent of the GDP in FY22, overshooting the budgeted target, said ratings agency ICRA in a report on Wednesday. With the state governments' fiscal deficit projected at a relatively modest 3.3 percent of GDP in FY22, the General Government fiscal deficit is estimated at ~10.4 percent of the GDP, said the report. "In the base case for FY2023, ICRA sees the GoI's fiscal deficit moderating to Rs 15.2 trillion or 5.8 percent of the GDP. Although the planned ceasing of GST compensation could cause the state governments' fiscal deficit to rise to the cap of 3.5 percent of the GSDP set by the Fifteenth Finance Commission, the General Government deficit would still compress to 9.3 percent of the GDP in FY23," the report said.

'Large miss on expected on receipts from disinvestment'

According to Aditi Nayar, Chief Economist, ICRA Ltd, "With a palpable buoyancy in tax collections, we expect the GoI's gross tax receipts to overshoot the budgeted amount by a healthy Rs 2.5 trillion in FY22. However, the net tax revenue gains to the GoI would be nullified by the expected large miss on receipts from disinvestment and back-ended spending, especially on those items that were included in the Second Supplementary Demand for Grants, such as food and fertiliser subsidies, export incentives/remissions under various export promotion schemes (such as MEIS and RoSCTL), equity infusion into Air India Assets Holding Limited, etc. Consequently, we expect the GoI's fiscal deficit to print at Rs 16.6 trillion in FY22, exceeding the budgeted amount of Rs 15.1 trillion."

"The Union Budget for FY23 will face some constraints owing to an expected slowdown in the growth in indirect taxes following the excise relief provided recently, and the moderation in nominal GDP growth to ~12.5 percent from the ~17.5 percent expected in FY22. Besides, macro-economic uncertainty would linger on account of the potential emergence of new mutations and fresh waves of Covid-19, which may eventually necessitate additional spending by way of extension of free foodgrains scheme and higher spending on MGNREGA. Given this backdrop, the GoI's ability to cement higher growth in direct taxes and garner disinvestment receipts would play a critical role in determining the extent of the fiscal consolidation that is feasible in FY23," Nayar added.

"Notwithstanding the lingering uncertainty, we believe that the Union Budget FY23 should ring-fence the funds that can realistically be absorbed for capital expenditure and infrastructure spending. Such outlays will help fuel the investment cycle, create employment opportunities and improve domestic demand. At the same time, rationalising of Centrally-sponsored schemes and Central sector schemes would enhance fiscal space, and further improve the quality/efficiency of expenditure," Nayar said.

ICRA pegs fiscal deficit at 5.8% or 6.9% of GDP

Given the uncertainty, ICRA has highlighted two scenarios for the fiscal – a base case (impact of current Covid wave limited to Q4 FY22 and no fresh Covid wave in FY23) and an adverse case (moderate Covid wave in FY23). In the base case, the government's fiscal deficit is pegged at Rs 15.2 trillion or 5.8 percent of the GDP, with net G-sec issuance placed at Rs 9.1 trillion.

In the adverse case, ICRA projects the fiscal deficit at a higher Rs 17.9 trillion (or 6.9 percent of GDP), driven by two major outlays intended to bolster confidence amongst households, amidst lower indirect taxes and compressed disinvestment flows. First, a likely distribution of free foodgrains for a period of six months under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) could cost Rs 0.9 trillion, while spending on the MGNREGA to support the rural economy could necessitate an additional outlay of Rs 0.3 trillion over and above our baseline estimate.

"While ICRA believes that the continued formalisation of the economy would protect the downside in direct taxes, curtailed consumption could dampen indirect taxes. In the adverse scenario, we foresee a potential net loss of revenue receipts of Rs 1.0 trillion, along with a shortfall of Rs 0.5 trillion in the disinvestment receipts. In this scenario, the GoI's net market borrowings are placed at a higher Rs 10.7 trillion," Nayar added. 

Assuming that 80 percent of the states' estimated fiscal deficit of Rs 9.1 trillion is funded by the State Development Loans (SDLs), suggests a net issuance of Rs 7.3 trillion. This entails total Centre and state net dated market borrowings for FY23 in a range of ~Rs 16.4 trillion (base case) to Rs 18.0 trillion (adverse case). Adding the redemption of G-sec and SDL indicates substantial gross borrowings in the range of ~Rs 22.6 trillion to Rs 24.3 trillion in FY23, up from an estimated Rs 20.9 trillion in FY22. The rise in dated borrowings will exert upward pressure on yields, exacerbating the impact of the expected hike in the repo rate of 50 bps in the coming fiscal.

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