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Budget 2023 | Economists evaluate importance of fiscal consolidation and role of infrastructure spending

Budget 2023 | Economists evaluate importance of fiscal consolidation and role of infrastructure spending

Budget 2023 | Economists evaluate importance of fiscal consolidation and role of infrastructure spending
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By Latha Venkatesh  Jan 25, 2023 12:40:27 PM IST (Updated)

In an interview with CNBC-TV18, Santanu Sengupta, India Economist at Goldman Sachs and Samiran Chakraborty, Chief Economist-India at Citi discussed at length what top economists are expecting in terms of income, expenditure and fiscal deficit as the income growth of the government would depend on the economy's GDP growth. 

Santanu Sengupta, India Economist at Goldman Sachs, and Samiran Chakraborty, Chief Economist-India at Citi, both agreed on the importance of fiscal consolidation and the role of infrastructure spending in the Indian economy. They also highlighted the potential impact of structural changes and the growth of the formal sector on tax revenue.

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Sengupta also said he thinks the RBI will have more degree of freedom by December and won't be thinking about a cash reserve ratio (CRR) cut. He also spoke about how, every year before the general elections, the government re-allocates expenses towards infrastructure, and it is important for the Centre continue with capital expenditure.
In an interview with CNBC-TV18, Sengupta and Chakraborty discussed at length what top economists are expecting in terms of income, expenditure and fiscal deficit as the income growth of the government would depend on the economy's GDP growth.
According to Street estimates, India’s nominal GDP should grow by 10 percent in FY24 versus 15.4 this fiscal. The net tax revenue of the government is expected to grow at the same pace as the nominal GDP — 10-10.5 percent. On the expenditure side, two items are being watched — subsidy is seen falling from about Rs 5.7 trillion to Rs 4 trillion as free food amounts and fertiliser prices are likely to fall. Capital expenditure which was budgeted to grow by 25 percent this year; the Street expects it would be budgeted to grow by a slightly slower, maybe 15 percent next year that is from Rs 7.5 trillion that the government spends this year to Rs 8.7 trillion next year.
Economists also want the fiscal deficit to come down to 5.8 percent from 6.4 percent this year. The Centre is expected to borrow a net Rs 11.6 trillion marginally above what it borrowed in the current year.
Sengupta also said he expects the fiscal deficit to consolidate to 5.9 percent, fully funded by subsidy reduction, showing the right optics of sticking to medium-term fiscal consolidation path on fiscal deficit.
“Our expectation is that we consolidate by 50 basis points to 5.9 percent of GDP from 6.4 in FY23, fully funded by the subsidy reduction. If you want to get to the medium-term fiscal consolidation path, so you want to get to about 4.5 percent in roughly 3-year’ time, then it's important to show at least the optics of getting around that 6 percent number,” said Sengupta.
Similarly, Chakraborty also emphasised the importance of fiscal consolidation. He stated that there are a few structural changes taking place supporting a larger borrowing programme, however, banks seem to be holding on to a higher statutory liquidity ratio (SLR). Chakraborty also pointed that there could be some steps which could result in a more populist looking Budget. He believes that the commitment to fiscal consolidation is important, and the net borrowing number will be looked at closely.
“For me, I would rather look at the extent of fiscal consolidation in this Budget. According to us, the fiscal impulse has been very strong over the last few years. Now is the time, in a cyclically adjusted way, to adjust for this fiscal impulse to be lower. Otherwise, there is a risk of current account deficit and inflation flaring up at the back end of the year, which in our view, is the more disturbing pre-election backdrop than a slightly slower growth,” he said.
Chakraborty also highlighted that the formal sector has grown faster than the nominal GDP aiding tax growth and better tax compliance could be aiding tax revenue. He also stated that the informal economy could pick-up from COVID-19 lows.
For the entire discussion, watch the accompanying video
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