Work towards fiscal headroom without timing the market
There are no surprises in the government’s FY23 borrowing calendar, which plans to raise about 60% of the total debt within the next six months. Rather, it dashed hopes—however feeble—of lower borrowing considering the higher-than-expected tax revenue in FY22, despite disinvestment proceeds proving to be a sting in the tail. In other words, the new financial year has begun with better cash balances and the fiscal deficit will likely print lower than 6.9% of GDP.
But the gains made last year could stand negated possibly due to a higher outgo on account of the PMGKY scheme, or higher fertiliser subsidies, lower divestments and others. Complicating matters, the current account deficit (CAD) may remain tricky should oil sustain above $100 per barrel throughout the fiscal. As it is, with import growth exceeding export growth in the past few months, the CAD-to-GDP ratio has likely crossed 1.7-1.8% in FY22—higher than the pre-pandemic seven-year average of 1.1%.
On its part, excise duties were budgeted lower in FY23 than FY22, which means the government has already absorbed the increase from $70 per barrel to $80. As for the remaining $20 per barrel, the burden is being passed on to households and firms with steady duty hikes. This will have implications on growth and inflation, and delay the RBI’s plan of shifting monetary policy’s role from being a substitute to complementing fiscal policy.
The dilemma for the central bank has been sticky inflation, but that’s now being accentuated by a discernible slack in the labour market, consistent with weak GDP growth. Meanwhile, fiscal policy is in a bind, notwithstanding improved cash balances in FY22. According to economists at JP Morgan, even though the February Budget has created buffers to guard against shocks by making conservative tax assumptions for FY23, it’ll have to confront several tradeoffs. So, as soon as markets begin to stabilise, authorities must plough ahead with planned asset sales/divestments to create much-needed fiscal headroom without trying to perfectly time the market.