Interest rates are expected to rise due to reduced fiscal consolidation


Indicating its reliance on economic growth to drive fiscal consolidation, the government has projected a budget deficit of 6.4% of gross domestic product (GDP) for the fiscal year 2022-23 – in line with the fiscal consolidation target , announced last year, to reach a budget deficit of 4.5% by 2025-2026. The government has said it will continue a “fairly steady” decline in deficit levels over this period.

For the 2021-22 fiscal year, the revised budget estimates set the budget gap at 6.9% compared to 6.8% estimated in the 2021-22 budget. The increased dynamism of tax collections is helping to finance high investment spending, while reducing the budget deficit, but at a slow pace. Revenue growth targets are realistic for next year while the infrastructure spending plan is ambitious.

Finance Minister Nirmala Sitharaman said total expenditure for the coming financial year is estimated at Rs 39.45 lakh crore, while total revenue other than borrowing is estimated at Rs 22.84 lakh crore. “While setting the level of the budget deficit in 2022-23, I am aware of the need to nurture growth, through public investment, so that it becomes stronger and more sustainable,” she said on Tuesday during the meeting. of the budget speech.

Notably, the government has increased gross borrowing from the market which is expected to be Rs 14.95 lakh crore for the next financial year, from Rs 10.46 lakh crore according to the revised estimate for 2021-22. Analysts note that this would put pressure on bond yields and could hit 7% in the near future. The 10-year bond yield rose sharply and closed at 6.85% on Tuesday, compared to its previous close of 6.68%. This indicates that overall borrowing costs will increase in the future.

The Fiscal Responsibility and Fiscal Management (FRBM) Act mandated the central government to limit the fiscal deficit to 3% of gross domestic product by March 31, 2021. However, the Covid-19 pandemic and the lockdown that resulted in a sharp increase in the deficit. as government spending jumped to support the economy. The Centre’s budget deficit was at a historic low of 2.5% of GDP in 2007-08.

The government is betting on a virtuous circle of growth, resulting from higher investment boosting private sector investment spending and aggregate demand, ultimately helping to reduce the deficit.

Economists say the sharp increase in capital spending levels and only a moderate increase in income point to a less gradual fiscal consolidation path than previously expected. “Our own calculation of the primary balance (excluding one-off revenues) suggests 70 basis points higher consolidation in the calculations. For states, a budget deficit of 4% of GDP will be allowed again, which includes room for maneuver of 0.5% which depends on the implementation of measures in the electricity sector,” noted Radhika Rao, senior economist at DBS in a research report.

Even though gross tax revenue increased by 50.3% from April to December 2021, the Center’s net tax revenue, after decentralization to the states, increased at a much higher rate of 64.9% during the same period, according to the budget documents, reflecting the growing use of collections that are not shared with the States.

From April to November 2021, the Centre’s total revenue, at approximately 76% of the budget forecast, was significantly above the five-year rolling average of 50.3% of the budget forecast (BE). Tax revenue (net in the center) and non-tax revenue reached 73.5% and 91.8% of their budget forecasts respectively.
Interest payments are the main component of the Centre’s revenue expenditure. In the revised estimates for 2021-22, interest expenditure is estimated at around Rs 8.14 lakh crore or 25.7% of revenue expenditure. For next year, total interest payments are estimated at around Rs 9.41 lakh crore or 29.4% of revenue expenditure.

Spending on major grants is estimated to rise from Rs 3.36 lakh crore in the 2021-22 budget estimates to Rs 4.33 lakh crore in the revised 2021-22 estimates. But in BE 2022-23, major subsidy expenditure is expected to drop to Rs 3.18 lakh crore, or 1.2% of GDP.

For the current financial year, against a total expenditure of Rs 34.83 lakh crore projected in the 2021-22 budget estimates, the revised estimate is Rs 37.70 lakh crore. The revised capital expenditure estimate is Rs 6.03 lakh crore. This includes an amount of Rs 51,971 crore for the settlement of outstanding secured liabilities of Air India. In terms of revenue, total revenue is estimated at Rs 22.04 lakh crore for 2022-23, compared to Rs 20.79 lakh crore for 2021-22. Divestment targets have been significantly lowered.


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