Despite the severe second Covid-19 wave, the central government is likely to meet its FY22 fiscal deficit target of 6.8% of GDP. Here is how.
Nominal GDP: The government had factored in 14.5% year-on-year (y-o-y) nominal GDP growth while estimating the FY22 budget estimate. The second Covid-19 wave may have reduced expectations for FY22 real GDP growth, but we note that nominal GDP growth will likely be in excess of 16% y-o-y due to a larger-than-expected GDP deflator. Therefore, the fiscal position is unlikely to face any material headwind, despite the severity of the second Covid-19 wave.
– Tax revenue: It must be said that the revenue targets that were set for FY22 were realistic and conservative to start with. The government had forecast net tax revenue collection growth of 14.9% y-o-y for FY22, with respect to FY21 revised estimate figures, which looked credible, given the nominal GDP growth assumption of 14.5% y-o-y. But we now know that the actual tax collection in FY21 turned out to be higher than the revised estimate, which implies that net tax revenue will need to rise only 8.5% y-o-y in FY22 over FY21 collection to meet the absolute tax collection target.
But, given the nominal GDP growth assumption of 16%-plus in FY22, net tax collection growth target of 14.9% y-o-y looks achievable, even after factoring in the second wave. Assuming net tax collection rises 14.9% yoy over the actual tax collection in FY21 (instead of using the lower revised estimate figure), we estimate tax revenues to be higher by about Rs 914 billion in FY22 versus what has been assumed in the budget estimate, ceteris paribus. The above dynamic is probably what gave the authorities confidence to transfer `750 billion to states in lieu of GST compensation cess without borrowing more from the market.
– Non-tax revenue: RBI has transferred Rs 991 billion dividend to the Centre, which is about Rs 500 billion more than the budget estimate.
– Asset monetisation: Rs 880 billion is expected in FY22 on account of this (we have factored in Rs 800 billion), which will help the revenue side of the budget.
– Disinvestments: The budget has assumed an ambitious target of Rs 1.75 trillion for disinvestments in FY22 and it is critical for the LIC IPO to go through in this fiscal year, if the overall target has to be met.
– Total revenue: Taking all the above factors into consideration, we estimate that the overall revenue collection for FY22 could be potentially higher than the budget estimate by Rs 384 billion. According to budget documents, Controller General of Accounts and Deutsche Bank research, the FY22 fiscal deficit (BE) is estimated at Rs 15,068 billion (6.8% of GDP), which is almost similar to Deutsche Bank’s estimate of Rs 15,084 billion (6.8% of GDP).
– Expenditure: The Centre announced a number of fiscal support measures to help various affected sectors; we estimate the additional on-budget fiscal cost to be 0.2% of GDP (or about Rs 400 billion).
Putting everything together: Based on the factors discussed above, we arrive at a rough estimate, which, in our view, keeps the fiscal deficit estimate unchanged at 6.8% of GDP for FY22. If the disinvestment target misses the mark by a bigger margin than what we have estimated currently, and if India encounters a severe third wave, which is not our base case scenario at present, then there could be possible upside risks to the fiscal deficit estimate.
The Centre is required to pay another Rs 830 billion for GST compensation to states in H2FY22, which is likely to be funded out of increased revenues, aided by the recently announced asset monetisation programme, with any shortfall on this front likely to be met by potential compression in capital expenditure (Rs 5.5 trillion allocation; +30% yoy) of a commensurate amount.
India chief economist, Deutsche Bank