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Business News/ Economy / Budget 2024: Govt's lower fiscal deficit target a boost to investor confidence, say experts

Budget 2024: Govt's lower fiscal deficit target a boost to investor confidence, say experts

The government has set its fiscal deficit target for FY25 at 5.1% of GDP

For FY24, revised total receipts estimated at ₹27.56 trillion against expenditures of ₹44.90 trillion. (Image: Pixabay)Premium
For FY24, revised total receipts estimated at 27.56 trillion against expenditures of 44.90 trillion. (Image: Pixabay)

New Delhi: Finance minister Nirmala Sitharaman’s pre-poll budget sent a strong signal to the market and to rating agencies on how the Indian government will lower its debt level–fiscal deficit is to be cut to 5.1% of gross domestic product in FY25, from 5.9% in FY24.

The finance minister also said the fiscal deficit estimate for FY24 has been revised to 5.8% of GDP, from the 5.9% estimated earlier for the financial year.

The Union government has managed to limit its fiscal deficit for FY24 in spite of having to moderate the nominal economic growth assumption for the current financial year, as per the first advance estimate released by the statistics ministry in December. 

For its fiscal deficit target of 5.1% of GDP for FY25, the government has assumed nominal GDP growth of 10.5% in the financial year. 

The government is seen to be prudent about spending, which instils confidence that it will meet the target of limiting the fiscal deficit to 4.5% of GDP over the next two years, said Rumki Majumdar, an economist at Deloitte India.

“The assurance from the government will help investors’ confidence and also ensure that sovereign yields are range-bound, which is important for financial stability," said Majumdar. “Besides, a controlled fiscal deficit reduces inflationary pressures and also increases room for private borrowing, thereby crowding in private investment."

Fiscal deficit is a result of the government’s total expenditures exceeding the revenue that it generates, excluding money from borrowings. A significant fiscal deficit can lead to a higher national debt and increased costs related to debt servicing. This can adversely affect the economy, potentially devaluing the national currency and hindering private sector investments.

The Centre’s gross borrowing target for FY24 has been limited to 15.43 trillion, against the budget estimate of 17.86 trillion made last February. As of 22 January, the government had raised about 14.08 trillion, or about 91% of the FY24 gross market borrowing target.

Experts say the government is keen to give investors confidence that it has control over its finances and is serious about adhering to its fiscal consolidation path. 

The announcement of the fiscal glide path shows the Centre’s commitment to keeping its debt at sustainable levels to ensure macroeconomic stability, while also leaving adequate legroom for private sector borrowings for stepping up their investments in capacity expansion, they said.

As per data from the Controller General of Accounts, the government’s fiscal deficit for the first nine months of the current financial year reached 9.82 trillion, which is 55% of the budgeted 17.87 trillion for the year. This figure represents a slight improvement from the previous year, where the deficit stood at 9.93 trillion or 59.8% of the FY23 budget estimate of 16.61 trillion.

Sitharaman on Thursday also announced the revised estimates for FY24, with revised total receipts estimated at 27.56 trillion against expenditures of 44.90 trillion. In comparison, the initial budget estimates for FY24 projected receipts at 27.16 trillion and expenditures at 45.03 trillion.

For FY25, the budget forecasts total receipts to be 30.80 trillion, with expenditures planned at 47.66 trillion, as outlined in the finance minister's budget presentation.

The interim budget assumes net tax collection growth at 26.02 trillion during FY25, from 23.30 trillion earlier, and disinvestment proceeds of 50,000 crore in FY25 aiding the fiscal consolidation journey. 

The subsidy bill, comprising social transfers for food, fertilizer and cooking gas, has been projected at 3.81 trillion for FY25, compared to a revised estimate of 4.03 trillion for the ongoing financial year. 

The budget also sends a strong message to the International Monetary Fund (IMF), which had in December flagged India’s “elevated public debt levels".

IMF had then recommended “ambitious medium-term consolidation efforts given elevated public debt levels and contingent liability risks", and suggested that improving revenue mobilization and spending efficiency would aid continued infrastructure building and targeted social support. 

IMF had also suggested a “sound medium-term fiscal framework to promote transparency and accountability".

Nirmala Sitharaman in her budget speech for FY22 had said that the government would pursue a broad path of fiscal consolidation to attain a level of fiscal deficit lower than 4.5% of GDP by FY26. But the fiscal deficit shot up to 9.2% in the pandemic year of FY21, twice the level seen in the year before.

The use of technology in tax administration, information-driven voluntary compliance, greater formalisation of the economy, expanding the scope of taxes deducted or collected at source, a growing tax base, and economic growth play a key part in the Centre’s fiscal consolidation strategy. 

“We continue on the path of fiscal consolidation to reduce the fiscal deficit to below 4.5% during FY2026," Sitharaman said during her budget speech on Thursday. “The fiscal deficit in 2024-25 is estimated to be 5.1% of GDP, adhering to that path."

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Published: 01 Feb 2024, 12:57 PM IST
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