Report: Economy needs more hand-holding, fiscal correction can wait

| | Mumbai
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Report: Economy needs more hand-holding, fiscal correction can wait

Saturday, 29 January 2022 | PTI | Mumbai

Report: Economy needs more hand-holding, fiscal correction can wait

Warning that any sudden and sharp fiscal consolidation steps can throttle the nascent and uneven recovery of the Indian economy, a Wall Street brokerage has said the Budget should instead focus on boosting overall demand, from rural consumption in particular, and invest more in infrastructure.

 The successive waves of the pandemic has made it more difficult to reduce government debt as a share of GDP in the medium-term, said Goldman Sachs in a pre-Budget note.

 It thus pencilled in a gradual fiscal consolidation with FY23 falling by 50 basis points to 6.3 per cent from 6.8 per cent in FY22, and set a target of bringing it down to 4.5 per cent by FY26.

 The brokerage believes that even though allocation for COVID  related expenses will come down, the government will have to continue to focus on welfare spending and also expects capex to increase 12 per cent.

 But the higher spending will most likely be financed by higher tax revenue in FY23 and deferred asset sales from the current year, helping reduce the deficit.

 It also sees the general government fiscal deficit falling to 9.3 per cent of GDP in FY23 from 10.1 per cent in FY22 on the back of stronger nominal GDP growth.

 If the Budget removes capital gains tax and withholding tax on foreign bond investments in the country, India will likely be included in the global bond index by Q4 of 2022 and this can help the country attract an additional USD 30 billion inflows in 2023, which again will lead to lower deficit.

 Gross tax collections in the first eight months of FY22 rose to 70 per cent of budget estimates which is the highest in the last 10 years. Direct taxes have grown 66 per cent on-year, led by income and corporate tax growth while indirect taxes have grown 39 per cent driven by buoyant GST and excise duties on fuel prices.

 The report expects gross tax revenue to overshoot budget estimates by about 1.1 per cent of GDP in FY22 and non-tax revenue to be higher by 0.1 per cent of GDP driven by increased dividends from the RBI and higher deferred payments from telcos.       

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