InvestorQ : Why does SBI expect that fiscal deficit may not spill too much in FY23?
prachi Patwardhan made post

Why does SBI expect that fiscal deficit may not spill too much in FY23?

sara Kunju answered.
2 weeks ago

It may be recollected that the Budget 2022 had pegged full year fiscal deficit at 6.4% for FY23. However, the markets have got mixed signals after that. Initially, the government did throw a hint that the fiscal deficit could spill to 6.9% due to loss of revenues on account of anti-inflation battle of the Indian government and the RBI. However, later the finance minister had publicly clarified that the Indian economy and the policy makers were immensely confident of holding fiscal deficit at 6.4%. Where does the truth exist?

One answer comes from the latest issue of the SBI Ecowrap which has pegged India’s full year fiscal deficit for FY23 at 6.5%. That is just 10 bps more than the budget target and is hardly a cause for worry. However, the first indications of pressure came when the Controller General of Accounts (CGA) announced that fiscal deficit as of the end of the first quarter ended June 2022 had touched 21.2% of the full year fiscal deficit target. In yoy comparison terms, that is substantially higher and point to higher eventual number.

SBI Ecowarp appears to be confident for several reasons. One argument is that the higher nominal GDP in FY23 will act like cushion and absorb higher spending in the form of subsidies committed for agriculture and fertilizers. SBI has expressed confidence that the central fiscal deficit for FY23 would not cross 6.5% of GDP. The bet is also that the tax revenues from GST will stay buoyant on macro growth triggers and supported by largely improved and better compliance through smarter application of technology.

During the year, the government has used monetary and fiscal measures to arrest inflation and that has a cost. However, the real concern expressed by the SBI Research team is on current account deficit. With trade deficit touching $100 billion in 4 months, the ratio of current account to fiscal deficit may shoot above 65% while the current account deficit may end up at 3.7% of GDP with risks on the upside. That entails policy risks for the rupee as foreign invstors and global rating agencies prefer current account deficit in check.