The Union Budget 2022 is likely to assume nominal GDP growth of 13-14% in FY23 despite rising inflationary concerns. The assumption of an even faster nominal GDP growth rate could raise inflationary expectations and send wrong signals to the market.

According to a survey by Moneycontrol, the finance ministry may reduce the nominal GDP growth rate assumed in the budget for  FY23 by 480 points from the projected rate for FY22. Predictions by 10 economists ranged from 11.4% to 14.5%.

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According to the National Statistical Office (NSO), a wing of the Ministry of Statistics & Programme Implementation, India’s GDP is likely to grow 17.6% in FY22 in nominal terms. 

Indranil Pan, chief economist at Yes Bank, said the upcoming budget is likely to assume nominal GDP growth of around 13.5% considering the broad guidance for next year’s real GDP growth is 7.5%.  Considering wholesale price index inflation continues to be on the relatively higher side you need to add around 5.5-6% of inflation.

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A survey released by the Reserve Bank of India in December predicted a real GDP growth rate of 7.6% in FY23.

According to the NSO’s first advance estimates, India’s nominal GDP growth in FY22 was 320 basis points higher than the 14.4% assumed in the 2021 budget, following the double boost from an extremely favourable base effect and high inflation.

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In April-December 2021, inflation based on the consumer price index averaged 5.2%, down from 6.2% in FY21. And inflation based on the wholesale price index (WPI) averaged 12.4%, up from 1.3% in FY21.

WPI is used extensively in India’s national income aggregates to deflate nominal price estimates and arrive at real price estimates.

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The nominal GDP growth assumed in the budget is crucial because it determines key government targets such as the fiscal deficit, capital expenditure and tax collection.

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Rahul Bajoria, Chief India economist at Barclays, expects revenue in FY22 to surpass budget estimates as strong nominal growth supported tax revenue and the trend is likely to continue  in FY23. Overall tax revenue is also expected to surpass the budget estimates in FY22 as the economy has withstood the second Covid wave and with higher inflation nominal GDP has surprised on the upside. He added that India’s nominal GDP will grow 13.6% in FY23.