Fiscal deficit could narrow to 6.3% in FY23: SBI

India's budget deficit target could narrow to 6.3% of gross domestic product (GDP) in the next financial year, according to a report by the State Bank of India.

Assuming that the government keeps the expenditure growth at 8% over FY22 estimates at ₹38 lakh crore in FY23 and receipts (minus borrowing and other liabilities) would grow by around 10.8%, it would lead to fiscal deficit of around ₹16.5 lakh crore or 6.3% of GDP in FY23, SBI economist Soumya Kanti Ghosh wrote in the research report.

The country is expected to meet its fiscal deficit target in the ongoing financial year, the report says. “Even if we consider the additional spending announced by the government in early Dec’21, fiscal deficit of the government still comes at ₹15.80 lakh crore or 6.8% of the GDP.”

The budget estimate (BE) for fiscal deficit during the current financial year is ₹15.06 lakh crore or 6.8% of GDP.

If disinvestment of state-run Life Insurance Corporation (LIC) passes through in FY22, the Centre might be ending fiscal with a large cash balance of ₹3 lakh crore, the report says, adding it can come handy in supporting a large part of government fiscal deficit without taking recourse to market borrowings.

Budget 2022 should also allow for very gradual fiscal consolidation, Ghosh recommends. "For FY23, the fiscal consolidation should remain limited to 30-40 bps from the current fiscal."

"The main objective of the budget should be to create an environment that will give further impetus to growth," by giving higher weightage to a short-term stabilisation policy rather than long term policy, the report says.

Ghosh, however, cautions that any new taxes like wealth tax or others at this point could do more harm than benefit.

India's largest lender expects net market borrowing of the Centre to be around ₹8.2 lakh crore and with repayments of ₹3.8 lakh crore, gross borrowings are expected at ₹12 lakh crore (73% of the fiscal deficit).

The report further calls for continuing support to micro small and medium enterprises (MSMEs). About 6.33 of these units in India contribute around 29% to India’s GDP, employing over 11 crore workers, it says adding that banks should lend them more by verifying their cash flows seamlessly through GST 4/ITR on a real-time basis.

In its sector-specific recommendation, the report suggested reintroducing the farm laws with necessary changes by giving states the autonomy to undertake the necessary farm sector reform.

As the country battles another wave of the Covid-19 pandemic, the government should consider exempting health insurance products from GST, at least for all retail and health focused products, it says.

The note also calls for rationalising existing taxation structure on contractual savings. "Under 80TTB, interest income from deposits by senior citizen (savings bank accounts, fixed deposits, recurring deposit accounts) up to ₹50,000 is exempted from income tax. This threshold may be increased to ₹1,00,000, which will have fiscal cost of only ₹2,000 crore."