India aims to keep FY23 fiscal deficit at FY22’s level – sources

  • India’s government will not be able to cut its budget deficit in FY23 as previously projected, officials said, but will seek to cap the shortfall at FY22’s level to prevent a major deterioration in public finances.
  • Efforts to maintain some fiscal discipline reflect New Delhi’s concern around risks to its sovereign credit rating but will likely limit the government’s firepower to contain inflation and provide relief to households and businesses.
  • In Feb 22, Prime Minister Narendra Modi’s government set a fiscal deficit target of 6.4% of gross domestic output (GDP) for FY23, compared with a deficit of 6.7% in FY22.
  • The sources said that while increased spending to provide relief from inflation meant the government would miss this year’s target, policymakers would seek to limit the deviation to 30 basis points.
  • “We will try to contain the slippage to last year’s levels,” one of the officials, who declined to be identified, told Reuters.
  • Surging costs forced India in May 22 to cut fuel taxes and change duty structures, hitting revenues by about INR1.5tr, while additional fertiliser subsidies lifted expenditure.
  • The government and central bank have scrambled to contain prices through fiscal measures and monetary tightening after inflation jumped to multi-year highs.
  • The government is wary of the risks fiscal slippage poses to its sovereign credit ratings. Its debt to GDP ratio, which stands at around 95%, is significantly higher than the 60-70% levels for other, similarly rated economies.
  • That leaves the government with little room to provide additional relief, as the May 22 measures are already expected to drive up the deficit by more than 30 basis points if revenue collection does not exceed the budget target.
  • “The government can definitely do more but at what cost? If more steps are taken, it will require additional market borrowing and that will drive up yields and eventually cause higher inflation,” said a second source who is aware of the discussions.
  • The government is reluctant to expand its record market programme of INR14.31tr in FY23, both officials said, adding that a decision on an additional borrowing requirement would only be taken in Nov 22.
  • The benchmark 10-year bond yield rose 1 basis point to touch the day’s high of 7.44% following the report, extending its gain to 4 bps on the day.
  • “From here on, monetary policy will bear the larger burden of initiating inflation-growth corrective balance. 2Q22 has been good in terms of tax collection, but alongside the excise cut could neutralise it,” said Shubhada Rao, senior economist and founder of QuantEco Research.
  • “Early days yet to quantify the extent of slippage, if any. The net borrowing is already large, it would be absolutely the last resort to go for additional market borrowing,” she added.
  • The first official said fertiliser subsidy bills could rise by INR500bn-INR700bn from a current estimate of INR2.15tr. Higher crude oil prices were also adding to the challenges while room for tax cuts was limited.
  • “We are aware that we may have to prepare ourselves for more measures but that may mean bringing down other growth-focussed expenditures,” he added.
  • The second official said that with little scope for more central government measures, state governments needed to do more to help control inflation. Tax collection remains the “bright spot” and had given the government some room to manoeuvre, the first official said.

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