Fiscal deficit estimate unlikely to be affected by fuel rate cut, say experts; Nomura demurs

Shishir Sinha | | Updated on: May 22, 2022

Impact on retail inflation to be seen in June numbers

Conservative budget estimates and buoyancy in tax revenue are likely to help the Centre preserve the fiscal deficit as estimated in the Budget. However, Nomura sees an increase of 40 basis points in the deficit estimate.

Meanwhile, experts agree that the impact of duty cut will be largely reflected in June CPI data, and that too by 10-20 basis points.

The Centre estimates a fiscal deficit of 6.4 per cent of GDP for FY23 based on collection estimates of over ₹1.38-lakh crore through the road and infrastructure cess on petrol and diesel. However, on Friday, the Centre reduced this cess, which will result in lower tax collection of over ₹1-lakh crore. At the same time, the government said it will provide ₹1.10-lakh crore (in addition to the previous ₹1.05-lakh crore) for fertiliser subsidy. Another ₹6,000 crore is planned for LPG subsidy.

Conservative estimates

Some assume that the higher than estimated expenditure and lower than estimated revenue will result in revision of budgeted fiscal deficit. However, DK Srivastava, Chief Policy Advisor of EY India and former Director of Madras School of Economics, does not think so.

“Estimates of nominal GDP growth at 11 per cent and tax buoyancy of less than one are very conservative. In fact, nominal growth rate could go up to 15-16 per cent and tax buoyancy could exceed one. These will keep the fiscal deficit within budget estimates,” he said.

Further, he said, fiscal room of over ₹2-lakh crore could be available this year, which the government can use as capital expenditure to push growth.

Absorbing costs

Aditi Nayar, Chief Economist with ICRA, also feels that additional costs on account of the new measures might not disturb the overall fiscal.

“The fiscal cost, while material, can be absorbed by higher than budgeted revenues through other taxes. We estimate the tax revenues of the Centre to surpass budget estimates by at least ₹1.3-lakh crore even after the excise reduction,” she said.

Nomura demurs

However, a note prepared by Sonal Varma and Aurodeep Nandi of Nomura has a slightly different view — it says fiscal slippage now appears inevitable.

“We raise our FY23 fiscal deficit forecast to 6.8 per cent of GDP from our earlier expectation that the government will meet the budget target (6.4 per cent of GDP). We expect fiscal headwinds (excise cuts, higher food and fertiliser subsidies, lower dividends and disinvestments) to offset the tailwinds (higher tax revenues and higher nominal GDP growth). We also raise our FY24 fiscal deficit forecast to 6.4 per cent of GDP from 5.8 per cent,” it said.

Minimal inflation impact in May

However, all experts agree on the impact on inflation.

Since only 10 days are left in May, the impact on retail inflation will likely be minimal in May, but will be reflected better in June numbers, which will be released in July.

EY India’s Srivastava estimates an impact of 10-20 basis points in headline numbers, while the Nomura note expects these measures to have a 20 basis points direct impact on CPI inflation (full impact to be visible in the June CPI data) and an additional impact of 10-20 basis points from second-round effects.

However, “we are leaving our CPI inflation projection for FY23 unchanged at 7.2 per cent y-o-y, due to a spate of other upside risks,” the note added.

Published on May 22, 2022
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