Budget preview, Credit growth, US GDP and more...
Welcome to the latest issue from This Week In Data. This week, we take a look at:
Credit growth
US GDP growth
Budget preview
Before we begin, a quick heads up. We have a revised data release calendar and data summary on IndiaDataHub. And it covers data for key global economies in addition to India. You can check it out hereAll was generally quiet on the data front this week. Within India, the only data of note was the fortnightly banking data. And as we suspected, the decline in the credit growth rate in the last fortnight of December turned out to be a blip. Credit growth in the first fortnight of January recovered to 16.5% YoY from 14.9% YoY in the preceding fortnight. Deposit growth also picked up to over 10% and is now the highest in over a year.
Globally, the key data released last week was the US GDP. US GDP grew 2.9% SAAR1 during 4Q 2022 as per the preliminary data. This was lower than the 3.2% growth in 3Q but higher than the market consensus estimate of 2.6% growth. The sequential moderation in the GDP growth was due to lower contributions from exports and investments.
Ok, so let us look forward to the next week. There will be a flurry of data, of course. But we also have one of the most hyped events of the year happening next week – the Union Budget. So, what can the finance minister do?
One of the things that is generally looked out for in a budget is a big spending program. And this being the last full-fledged budget of the government before the elections (next year’s budget will be an interim budget, going by tradition), the stage is, in a sense, set for it. There is also this looming threat of a global recession. And given the level of monetary tightening that has happened even in India, some slowdown in growth is inevitable. And as we discussed in our monthly State of Economy report yesterday, we might have already started to see the first signs of a slowdown in the high-frequency data.
However, as we discuss below, even if the FM were to want to undertake a big fiscal expansion, she is in a sense constrained by the economic backdrop against which the budget is being presented. Consider the following:
The economy is coming off a phase of high inflation. Even after the moderation in the last few months, CPI remains above 5% and the RBI’s monetary policy bias remains towards more tightening. A big fiscal expansion against this backdrop, will not be very wise.
The last two years have seen strong tax buoyancy. The tax-to-GDP ratio is likely to be close to an all-time high in the current financial year. This was at least partly aided by the strong nominal GDP growth which has grown in the high teens in the current and last year. However, with inflation & commodity prices having eased, nominal GDP growth next year will moderate to low double digits at best. And this will mean slower growth in revenues in absolute terms and a smaller incremental pool of resources to allocate.
We must not lose sight of the fact that the fiscal deficit remains high. As the chart above shows, in the current financial year, the FM has committed to keeping it at 6.4% of GDP. This is ~3ppt higher than the pre-pandemic average. The finance minister has committed to a path of reduction in the fiscal deficit to 4.5% of GDP by FY26. This is a reduction of almost 2ppt over the next three years. While the FM has not committed to a yearly target, for any deficit reduction, expenditure growth must be slightly lower than the growth in revenues.
The other thing that is generally looked out for in the budget is big changes in the tax rate or the tax regime itself. And here again, the FM finds herself with limited scope for things to do.
The indirect tax regime has seen reform with the introduction of the GST and the management of GST is now with the GST Council. The FM at her discretion cannot make any changes.
The corporate tax regime has seen a big reform just a couple of years back wherein the corporate tax rate was reduced to 25% and for new manufacturing firms to 15%. One can argue that the 25% corporate tax rate is still high, but reducing the corporate tax rate heading into a general election does not sound likely.
That leaves the personal income tax regime. But even here, the FM has announced the new regime with lower tax rates and no exemptions. One suspects the new regime is what the Government wants the people to transition towards. So, it is quite likely that the new regime could be made more attractive – this could be through a lowering of the applicable tax rate or widening of the slabs under the new regime.
Lastly, we must not lose sight of the fact that the Union Budget is just one part of the story when it comes to Government policy. The other and increasingly bigger part of State governments. The states put together spend more than the Central government. In FY22, the combined expenditure of all states, excluding interest payments, was almost 30% higher than the Central government. And in the years before the pandemic, State government expenditure used to be 50% higher than that of the Central government (net of interest payments).
In several key developmental categories such as Agriculture & Rural Development; Education, Arts & Culture; Medical & Public Health; Roads & Bridges the states in aggregate generally outspend the central government by a wide margin. Thus a 10% change in expenditure by States has a bigger economic impact than a 10% change in expenditure by the Centre. And the reason this is happening is because a majority of the tax revenue that is collected gets allocated to the states. While the Centre collects more taxes, it devolves 42% of what it collects (excluding cess and surcharge) to the states. Effectively, almost 60% of the taxes collected in India, are spent by the States.
Thats it for this week! Next week we will review the budget and see whether this preview was jinxed 😊. We will also get early data into how January shaped up.
SAAR refers to Seasonally Adjusted Annual Growth. US GDP is generally reported on a SAAR basis. This is calculated as change in seasonally adjusted GDP on a quarter-on-quarter basis and then this quarterly growth number is annualised.