For the current year, economists expect India’s fiscal deficit to trend around the highest level in 30 years at 7.1 per cent reflecting the damage to the government’s finances caused by the Covid-19 pandemic.
The economy entered a technical recession in the first half of this financial year after the GDP collapsed nearly 24 per cent year on year in April-June and another 7.5 per cent in July-September.
However, the GDP growth is expected to have turned positive in the December quarter, full one quarter ahead of the Reserve Bank of India’s expectations, led by strong pen-up demand and easing of Covid-19 restrictions.
“With expenditures supported by strong nominal growth, optimism on tax collection and the government’s aggressive estimates for disinvestment and non-tax proceeds, we expect the fiscal deficit target to be set at 5.3 per cent of GDP in FY22,” Nomura Financial Advisory and Securities India said in a note.
Crucially, the rebound in economic growth has already given a fillip to the government’s tax collections in the second half of the year, as GST collections hit an all-time high of Rs 1.15 lakh crore in December.
Brokerage BOB Capital Markets believes India’s nominal GDP will grow sharply by 14 per cent next fiscal year, resulting in 16 per cent growth in direct and indirect tax collections for the government.
With the revival in capital markets, economists expect the government to be able to achieve a large part of its divestment target from this year in the next financial year, which along with higher dividends and receipts from a possible 5G auctions should help lower the borrowing requirement.
Brokerage Phillip Capital expects the government’s net market borrowings to fall 19 per cent on year to Rs 7.85 lakh crore in 2021-22 with gross market borrowing likely to decline 12.1 per cent to Rs 10.6 lakh crore.
Given that the nominal GDP growth in India has the potential to overshoot government’s and Street’s expectations of 13 per cent next year, Credit Suisse Securities India believes spending can grow 20-21 per cent year-on-year, giving a further pro-cyclical push to the economy.
Given the large share of non-discretionary expenditure, it would imply Rs 3.1 lakh core higher spending over 2020-21 on residual heads, with expenditure-to-GDP of 15.4 per cent, the highest in a decade, Credit Suisse said in a note.
“The focus of the Budget should be to revive India’s private sector capex cycle. Crowding in investments through higher infrastructure spending financed by asset monetisation will be the key,” BOB Capital said.