As the Centre is all set to table the general budget for the next financial year tomorrow, EY India has said FY24 could be a challenging year for the government with the likely fall in the nominal GDP, which will restrain the fiscal elbow room for the government. The agency has called for a tough balancing act to ensure a "credible" fiscal consolidation path, while at the same time ensuring the economic growth in the country.
"FY24 economic and fiscal prospects appear to be more challenging for India as compared to FY23. Real GDP growth may fall from 7 percent in FY23 to about 6% to 6.5% in FY24. This would still be quite credible given the global headwinds which may lead to substantive negative contribution of net exports to GDP growth. This trend needs to be suitably balanced by domestic growth drivers while the government of India may be required to continue to support growth through sustaining its emphasis on infrastructure and capital expenditure growth," EY India said in the January issue of EY India Economy Watch.
"We also note that the IPD-based inflation may fall from 7.9% in FY23 to 5% in FY24. As a result, the nominal GDP growth may fall to 11.5% in FY24 as compared to 15.4% in FY23 resulting in lower fiscal resources for the government. This would constrain the pace at which fiscal consolidation can be undertaken. A tough balancing act is required to ensure that a credible fiscal consolidation path is spelt out while also providing continued fiscal support to growth," it said.
EY India report said policy responses to the COVID-19 shock mainly affected FY21 resulted in a sharp increase in central fiscal deficit relative to GDP to 9.2 percent. "This was more than three times the FRBM norm of 3 percent. In the two succeeding years, fiscal deficit could be reduced to 6.7 percent and 6.4 percent of GDP respectively assuming that the budgeted fiscal deficit target for FY23 is achieved. With FY24 being the first post-COVID-19 normal year without any base effects characterizing GDP, it would be best for the government to spell out a convincing glide path towards fiscal consolidation," said EY India in the report.
"The need for correction in government's fiscal deficit primarily arises because of the relative profile of savings and investment as a percentage to GDP. Household sector financial savings plus net inflow of foreign capital provide the extent of surplus available for the potential net deficit sectors in the economy which consists of government and non-government public sector and the private sector. Household sector financial savings had averaged 7.9 percent of GDP during FY18 to FY20 before it increased inordinately to 11.6 percent in FY21 due to an upsurge in the precautionary motive in the COVID-19 year," it said.
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