Fiscal deficit in check in FY23?

One of the big expectations of the rating agencies was that the fiscal deficit be put on a glide path down. Despite fiscal deficit overshooting by 10 bps at 6.9% in FY22, the government has guided for lower fiscal deficit of 6.4% for FY23. While the intent is good, the budget 2022 has still kept a very languid time table to reach 4.5% fiscal deficit target by FY2026. But, the bigger question is how will the 6.4% target be achieved. 

Borrowings are sharply up

Now, that is the million dollar question. If the fiscal deficit is going to be lower and the revenue deficit is going to fall by a sharper number, what is the need for so much borrowing. Ideally, central borrowings are done to bridge the fiscal gap in the Union Budget. But, the total borrowings of the central government for FY23 is growing really sharply. In FY22, the total borrowings are likely to close at Rs.12 trillion. However, for FY23 the total borrowings are estimated at a whopping Rs.14.95 trillion. That is fairly hard to explain considering the lower revenue deficit. The logical corollary is that the government may be planning to take up huge capital spending in FY23. 

Capex is part of the answer

If you look at the budget signals, even that argument of higher capex is only a part of the answer. Here is why. FY23 revenues in terms of tax collections are supposed to be robust, so that is hardly a concern. Secondly, the government has cut its disinvestment targets for FY22 and FY23, but that is just what the situation actually is. Also, the fall in the divestment revenues will be offset by sharply lower spending on subsidies. The third aspect of capex is also only partly true since Budget 2022 has also admitted that most of the capex takes place at the state level, which is why the limit of state GDP has been raised from 3% of GSDP to 4% of GSDP. The fiscal math is not justifying the borrowings. 

What could trigger a shift?

The billion dollar question then is; why the government is taking the risk of a sharply higher borrowing plan, knowing fully well its implications. The decision to hike annual borrowings by 25% has also been red-flagged by global rating agencies like Fitch and Moody’s. While, India’s sovereign rating remains at just above speculative level, the outlook is already negative in the case of Fitch and S&P. In the last couple of years, the total borrowings have already crossed 90% of GDP, a level much higher than the rating peer group. It is truly hard to fathom why Budget 2022 took such a big risk in boosting FY23 borrowings!