As the government authorities prepare their first Budget of the new term, they seek to remain on the path of deficit and debt consolidation while invigorating the economy to return to its pre-pandemic path, revealed Senior Economist Radhika Rao in a latest report by DBS India.
FY24 fiscal deficit narrowed by 20 basis points to 5.6 per cent of GDP compared to revised 5.8 per cent of GDP, putting the central government’s consolidation at 80 basis points last year. This implies that borrowings were more than the financing need, leaving a bigger cash buffer, which sets the FY25 math on a favourable footing.
FY25 fiscal math is set against the backdrop of a better-than-expected performance in FY24. Compared to revised estimates, the actual fiscal numbers for last year showed strong revenues helping to beat the revised fiscal deficit target by 20bp to 5.6 per cent of GDP.
This suggests that the existing FY25 goals leave a shorter distance to travel from 5.6 per cent to the interim 5.1 per cent, that is a 50 basis points consolidation compared to last year’s 80 basis points, said the report.
Nominal GDP projected at 10.5 per cent for FY25 has room to outperform, considering the prevailing run-rate of 7 per cent real growth and expected normalisation in the GDP deflator (to ~4-4.5 per cent).
Despite the room for an additional cushion, the nominal GDP pace is not expected to be revised at the final budget presentation, reflecting the preference to be conservative in underlying assumptions, Rao highlighted.
Revenue windfall, following the strong run-rate in direct and indirect tax collections, and a record high surplus transfer from the RBI to the tune of Rs 2.1 trillion (~0.6 per cent of GDP) for FY24, compared to the budgeted Rs 850 billion, last year’s Rs 874 billion. This provides a fiscal cushion of 0.35-0.4 per cent of GDP this year. Gross tax collections also surprised on the upside on higher personal income tax collections.
The revenue headroom provides the policymakers the opportunity to concurrently increase expenditure while also consolidating finances.
A pickup in overall revenue receipts is expected, building on buoyant tax collections last year on the back of strong growth. On the expenditure end, the underlying tenet is here that the economy stands to benefit from higher expenditure multipliers rather than purely consumption stimulus. The revenue buffer of 0.4 per cent of GDP due to the surplus transfer is likely to be split between higher revenue expenditure and faster fiscal consolidation, the report added.
Capital spending has seen a modest start this year, with a 14 per cent decrease in Apr-May24, partly due to the general elections. With eight months remaining in the fiscal year after the final budget presentation, any increase in allocations may need to be reconsidered, based on progress made. Rest of the revenue buffer is likely to be channelled towards lowering the fiscal deficit to Rs 16.3 trillion to 5 per cent of GDP compared to the interim budget’s 5.1 per cent. This will mark a step towards the FY26 target of ‘below -4.5 per cent’, Rao stated.
The choice on hand is to whether cutback on borrowings owing to the better cash buffer to keep borrowings intact.
The borrowings is expected to be maintained at Rs 14.1 trillion in FY25, with approximately 60 per cent borrowings scheduled in first half of the year. Any revisions or rollback in the dated securities is likely to occur later in the year, subject to the strength in revenues and pace of monthly consolidation. T-bill issuance might be cut from interim budget’s Rs 0.5 trillion and down from Rs 1.4 trillion actual in FY24, the report further said.
