Budget 2023: Why FM Sitharaman should target reduction in fiscal deficit to GDP ratio – Times of India

Union Budget 2023: Finance Minister Nirmala Sitharaman is well-placed to adhere to the budgeted fiscal deficit level of 6.4% of GDP, says EY in its November Economy Watch report. The fiscal deficit was at 9.2% of GDP in FY21, and at 6.7% in FY22. According to EY, for three successive years, the government’s fiscal deficit to GDP ratio was more than double the FRBMA (2018) target of 3%.
“In order to create fiscal space for the future, it is important for the FY24 Union Budget to target a reduction of at least 1% point as compared to the FY23 budgeted fiscal deficit,” the EY report says. The 15th Finance Commission report looks at a worst case scenario of 4.5% fiscal deficit by FY26 in case the economic recovery is slower than assessed.

EY says that with respect to medium term growth prospects, it is important that the India Budget 2023 signals a return to fiscal consolidation. This is important after the upsurge in the fiscal deficit to GDP ratio during the pandemic and the subsequent years, it says.
The debt-GDP ratio of the central government has also increased from 51% in FY20 to 61% in FY21. It is estimated at a high level of 58.5% in FY22 (RE) and 59% in FY23 (BE). “This implies a higher interest payment to GDP ratio. The burden of interest payment would be high both because of the pressure on interest rate and relatively higher debt level,” EY explains.
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The report adds that in her Budget 2023 speech, FM Sitharaman may lay out a credible glide path for reducing fiscal deficit and debt relative to GDP. “This would facilitate maintaining a robust medium-term growth for the Indian economy along with improved fiscal room for supporting growth,” it says.

As per the IMF, fiscal deficits relative to GDP in advanced economies and emerging markets & developing economies are expected to remain elevated. Oil importing economies like India and China are expected to face high fiscal deficits. In China, the fiscal deficit to GDP ratio is projected to average (-)7.5% during 2022 to 2027 as compared to (-)3.4% during the pre-pandemic period from 2014 to 2019. Similarly for India, the average fiscal deficit relative to GDP during FY23 to FY28 is projected at (-)8.4%, which is up from (-)6.9% during FY15 to FY20.
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Apart from the US and South Africa, the general government fiscal deficit relative to GDP in all other selected countries is projected to steadily decline from 2022 to 2027.
EY is of the view that the Modi government would be comfortably placed in terms of fiscal resources and in terms of growth and inflation profiles for the preparation of the Union Budget 2023-24.