New Delhi: The new government may cut the fiscal deficit target for the current financial year when it presents the full budget in July, encouraged by a better-than-expected deficit reading for FY24 and the generous dividend payout from the central bank, people familiar with the development said.
In the interim budget in February, the government had set the FY25 fiscal deficit goal at 5.1% of gross domestic product and revised the FY24 target to 5.8% from the previously budgeted 5.9%.
It ended up improving on the revised estimate for FY24, containing the fiscal gap at 5.6%.
The target for the next fiscal year, starting April 1, 2025, is 4.5% of GDP and the government may seek to improve on that too, as policy continuity is expected, with exit polls projecting Prime Minister Narendra Modi to retain power with a strong majority, the people cited said.
Budget calculations and the course of policymaking, though, could depend on how the election results turn out. The final decision would be made by the new government closer to the full budget in July, one of the people told ET.
Global Rating
“But the extra RBI dividend alone has created space for a 30-basis-point reduction in the fiscal deficit target for FY25,” the person cited earlier said.
The RBI last month announced a transfer of Rs 2.11 lakh crore to the government, more than double the proceeds budgeted from the central bank and state-run lenders. In absolute terms, the interim budget had estimated the fiscal deficit for FY25 at Rs 16.85 lakh crore.
“The question now is: should we have a lower target (for FY25) in July, or should we retain the current target and beat it in actual performance? This is something that will be decided,” said the person quoted above. A faster consolidation could also enthuse global rating agencies, which have consistently flagged India’s “weak” fiscal metrics, to have a more favourable view of India, experts said. Moreover, it will add credibility to the government’s target-setting.
Last week, S&P Global Ratings lifted its sovereign rating outlook for India after a gap of 14 years to “positive” from “stable”, while retaining the rating at the lowest investment grade of BBB-minus, saying robust economic expansion was having a constructive impact on the country’s credit metrics.
The ratings firm said it could upgrade India’s sovereign rating in the next two years if the country adopts a cautious fiscal and monetary policy that diminishes the government’s elevated debt and interest burden, while bolstering economic resilience.
No Stimulus Needed
The higher-than-anticipated growth rates for both the March quarter (7.8%) and fiscal year 2024 (8.2%) suggest economic activity gathered traction even without any fiscal stimulus, thanks to the government’s sustained focus on spending quality in the form of a capex push, they said.
The growth momentum will likely continue through FY25. “There is no question of a fiscal stimulus at the moment,” said one of the people cited earlier.
According to the RBI, the economy is expected to grow 7% in FY25, even on an unfavourable base.
Any reduction in the fiscal deficit target would result in lower market borrowing by the government. It has budgeted gross market borrowing at ₹14.13 lakh crore for FY25.
While some restructuring of spending programmes is expected in the full budget, the final expenditure outlay for FY25 may not substantially differ from the one presented in the interim budget (₹47.66 lakh crore) if the current regime continues, another person said.
Meanwhile, non-tax revenue mop-up, at the very least, will see a spike in the July budget, reflecting the additional RBI dividend. The overall revenue receipt estimate, too, is set to go up accordingly, from the budgeted Rs 30 lakh crore.
Icra chief economist Aditi Nayar acknowledged the “favourable” fiscal dynamics for FY25 on continued resilience in goods and services tax collection and elevated RBI dividend. She expected the FY25 fiscal deficit target to remain in the 4.9-5.1% range.
