High nominal GDP rate is more of good optics

The first advance estimate for the real GDP growth at 7% in FY23 may not have surprised many. The nominal GDP number of Rs 273 lakh crore surely came as a pleasant surprise to the government. The nominal GDP, calculated at the current market price (instead of the base year price), indicates the economy’s size. The government had estimated Rs 258 lakh crore nominal GDP earlier in FY23. But the number could end up on the higher side, thanks to higher inflation. (The nominal GDP is slated to grow at 15.4%). It serves two purposes: making the government’s finances look better as ratios like fiscal deficit and current account deficit are calculated as a percentage of the nominal GDP and help get closer to a $5 trillion economy.

The budgeted fiscal deficit target is Rs 16.61 lakh crore. If the government manages to stick to it, the fiscal deficit in GDP percentage terms will be 6% instead of the official target of 6.4%. That’s because the base has now changed from Rs 258 lakh crore to Rs 273 lakh crore. It allows the government to increase the fiscal deficit by Rs 86,000 in the current financial year without breaching the 6.4% target. Another advantage of a higher nominal GDP is better tax collection. With the government’s gross tax kitty likely to overshoot the budget target by Rs 1.5–2 lakh crore, it may not have to worry too much about less than targeted non-tax revenues and disinvestment proceeds.

We are also closer to the government’s much-sought-after target of a $5 trillion economy. At an average US Dollar to INR rate of 80, our economy would be closer to the $3.5 trillion mark by the end of FY23. But then, these are only the first advance estimates. The second is due by February-end.

Besides, the National Statistics Office (NSO) will release the revised estimate of annual national accounts for the last three years by the end of this month. So, the numbers may look different in a month or two. Also, it is highly unlikely that the economy could sustain the high nominal GDP growth rate (15.4% in FY23) next financial year. Some analysts are already estimating the nominal GDP to grow at a single digit on the expectation of lower inflation next year (RBI expects retail inflation in FY24 to be around 4%). Therefore, while the government can celebrate for now, it should not get ahead of itself.