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Interview by Kavita Rao, Director NIPFP, given to Informist Media Pvt. Ltd. New Delhi, on January 20, 2023.


By Priyasmita Dutta and Krity Ambey


NEW DELHI – While staying the course on fiscal consolidation will be a priority for the upcoming Union Budget, the government may have to push its aim to lower fiscal deficit to below 4.5% of GDP by another year to 2026-27 (Apr-Mar), said Kavita Rao, director at National Institute of Public Finance and Policy.
In the Budget speech for 2020-21, while accepting some proposals of the 15th Finance Commission, Finance Minister Nirmala Sitharaman took some leeway and said the government was committed to lower fiscal deficit to 4.5% of GDP by 2025-26. The Commission had recommended that the deficit be trimmed to 4.0% by 2025-26.
"Maybe another year down the line, they may try and aim for 4.5%, but the orientation is to keep consolidation on priority," said Rao in an interview to Informist. 
The Budget, to be presented on Feb 1, is likely to focus on capital expenditure and fiscal consolidation, Rao said
Elaborating on the challenges that India may face from the global slowdown, she said: "Economic growth in the country will experience some downward pressures, if not dramatic downward direction," Rao said.
Factoring in these headwinds, Rao said, India can expect to grow at 6% in 2023-24 and the "worst case scenario is 5.5%". With GDP growth at 6% and inflation at 5%, nominal growth in GDP could be in the range of 11.5%-12.0% in the next financial year starting April, she said.
Rao said, the Budget for 2023-24 will aim for a fiscal deficit of about 5.8-6.0%. As for this financial year, "we'll remain onboard, a little more or less… 6.3-6.4%," she said.
For the current financial year, the government's estimate for nominal GDP is pegged at 15.3% while fiscal deficit is 6.4%.
Below are edited excerpts from the interview:
Q. What do you think should be the focus of the Budget for 2023-24, especially as it's the last full Budget before an election year?
A. I think the government would still be looking at fiscal consolidation as its priority, and it will continue to allocate reasonable growth to capital expenditure. 
Challenges come from the fact that the world is expecting a slowdown. So economic growth in the country will experience some downward pressures, if not dramatic downward direction. And if we successfully rein in inflation a little, with nominal GDP growth a little lower than in the current year, tax revenue growth is expected to be lower. So trying to find resources to do what all they seek to do can be a little challenging.
The timelines for 4.5% fiscal deficit might be moved down by a year, but the orientation would be to keep consolidation on priority… I think the focus will be on fiscal consolidation and capital expenditure.
Q. Where do you see subsidy bill in 2023-24? Do you see fiscal management to be easier on the back of likely lower provision for subsidy and the Mahatma Gandhi National Rural Employment Guarantee scheme? 
A. I would think given that the free food scheme has already been dealt with, there shouldn't be any additional announcements on that front. On the fertiliser front, there is always a mixed bag. It depends on so many other international factors, so we have to see how it plays out. My own impression is that in the last Budget, the government under-provided for both the things, so there was an overshoot. So it all depends on whether the government can find resources to budget upfront on fertilisers. On food, I think the picture is pretty clear, so there is no uncertainty there.
About MGNREGA, let's say the economy is doing well, you expect a decrease in demand for these rural jobs. Apart from any lagged payments, the expenditure on the programme would depend on growth in the economy. It is meant to be a demand-based programme, but concerns have been expressed on how quickly the system responds to an increase in demand. Clearly, uncertainty in economic performance would transmit into uncertainty in demand for work under MGNREGA.
If the world goes into a severe recession for whatever reason and India's growth is affected, then you have no choice. If there is another COVID-19 wave, then there is no choice. Then the story will change completely. But in a status quo situation, I don't see the Budget being able to cut down on MGNREGA spending, but any substantial increases may not be there.
Q. What do you think would be the GDP growth in 2023-24?
A. India doesn't dramatically fall off the shelf, so we should expect growth of 6.0%; the worst case scenario is 5.5%, but I don't think we are dipping to 5.5%. A growth of 6.0% and inflation of 5.0% will lead to a nominal GDP growth of 11.5%-12.0% in 2023-24.
Q. Where do you see the fiscal deficit in the current financial year and the next?
A. My sense is that we will remain onboard… a little more or less 6.3-6.4% for the current fiscal year. There was a severe underestimation of revenue and in some major heads of expenditure. On the expenditure side, there is an upward revision through supplementary demands for grants. On the receipts side, we don't really book into the supplementary demands so that comes as a complete extra. But available information on receipts suggests additional revenues for the Union government of about 3 trln rupees. So new deficit figures would be similar to the Budgeted numbers.
I would expect tax receipts to be growing 14-15% in 2023-24, which is very buoyant. The Budget would aim for fiscal deficit as a proportion to GDP of around 5.8-6.0%. This would provide the resource envelope for expenditures in 2023-24. 
Q. Do you think there is scope for cutting income tax rates, given that the demand in the economy remains fragile?
A. I sincerely hope there is no change. It has been my conviction that the income tax structure should not be tinkered for the next 10-15 years. There is need to bring in more taxpayers into the regime, as has been repeatedly articulated by many. This cannot be achieved by tinkering with the exemption thresholds. It should bring in more people into the income tax net by creating a larger group of stakeholders for influencing or contributing to discussions on policies in the country.
Q. India's exports have remained under pressure over the last five months, pushing up the trade deficit. What are the kind of measures the government could announce to tackle the issue?
A. Many countries are looking inwards. The external market is not something you have control over, so you adjust as per the international scenario. This could be the time to use schemes like production-linked incentives for targeted investments in the domestic market. That is where one can apply a push. 
Secondly, let's assume exports are not going well, still India's growth is expected to be 6.0%. Most forecasts look at 6.0%-6.1%. With this, we are not in crisis like the rest of the globe.
Thirdly, normally you allow your exchange rate to gradually depreciate and that stimulates exports by making exports cheaper; this makes imports expensive so current account deficit adjusts. Our difficulty is that we are also dependent on foreign capital flows. And for the comfort of the foreign portfolio investors and foreign direct investors, depreciation doesn't work. So it is a trade-off between trying to manage your CAD and fund flows.
I would say, we as a country, are looking inwards. We are looking at domestic demand to fill in for lack of international demand. The only challenge in that is imports tend to grow when the domestic economy is growing. It expands your CAD even more. So general recommendation across the board seems to be that you want to gradually let the rupee depreciate. But this is a very general statement and the actual policy calibration by the Reserve Bank of India would depend on the available foreign exchange reserves as well as the expectations on future flows.
The views expressed in the post are those of the authors only. No responsibility for them should be attributed to NIPFP.
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