Fiscal consolidation set on cruise control

Last May, the RBI approved a dividend of   ₹2.11 trillion for the central government for FY24.
Last May, the RBI approved a dividend of   ₹2.11 trillion for the central government for FY24.

Summary

  • Thanks to a reduction in capital expenditure and a generous dividend from RBI, India may end FY25 with a fiscal deficit at 4.7-4.8% of GDP, better than initial estimates of 4.9%

India may record a fiscal deficit for FY25 at 4.7-4.8% of GDP, below the budgeted estimate of 4.9%, marking yet another step towards fiscal consolidation.

The revision is expected to be primarily driven by lower expenditure, notably on planned capital investments, along with higher-than-anticipated dividends from the Reserve Bank of India (RBI), two people aware of the matter said.

"Continuing on the path of fiscal consolidation is a major focus of the government," one of the two people cited above said on the condition of anonymity. "For FY26, the plan is to keep the fiscal deficit within the target of 4.5%, as per the glide path. The actual fiscal deficit targeted for FY26 could be slightly lower," the person mentioned above said.

Fiscal deficit refers to the shortfall between a government's income and expenditure and is expressed as a percentage of gross domestic product or GDP. A higher fiscal deficit raises debt and debt servicing, which strains the economy and risks devaluing the currency and impacting private investments.

Also read | Centre to better medium term target for fiscal deficit

The Centre has committed to the fiscal consolidation roadmap outlined in the FY22, aiming to reduce the fiscal deficit to below 4.5% of GDP by FY26.

Spending slowdown

India’s GDP growth slowed to 5.4% in the September quarter, the worst in nearly two years. This was largely due to uneven performance across sectors, with a decline in private consumption growth and government spending offsetting a rural recovery.

During the September quarter, government final consumption expenditure (GFCE), a proxy for government investment, grew 4.4%, swinging from a decline of 0.24% in the June quarter marked by disruptions in government spending due to the national election. In the year-ago second quarter, though, India’s GFCE was much higher, at 14%.

Meanwhile, Goods and Services Tax collections have performed strongly in the current fiscal, while direct tax revenues have remained robust, even with a modest slowdown in corporate tax collections.

"On the revenue front, the Centre is likely to exceed budgeted targets for direct tax collections (in FY25), which, along with the record RBI dividend, will further help in fiscal consolidation," the second person added.

Also read | Mint Primer | The 3% fiscal deficit target: Is it sacrosanct?

"The fiscal performance of the government will send out positive signals to both domestic and foreign investors, especially at a time when the global economy is slowing down," the person said on the condition of anonymity.

The Centre’s direct tax collection from corporations and individuals after adjusting for tax refunds touched ₹15.8 trillion till 17 December, jumping 16.45% over the previous year and outpacing the budget estimate.

Meanwhile, non-corporate tax collection from individuals and other entities like partnerships and local authorities, after adjusting for refunds, recorded a 22% jump so far this year to  ₹7.97 trillion, while taxes from corporations improved 8.6% to  ₹7.42 trillion, according to the Income Tax Department data citing revenue figures up to 17 December.

Massive RBI dividend

Last May, the RBI approved a dividend of   ₹2.11 trillion for the central government for FY24, a massive 141% higher than in FY23. The dividend, paid in May 2024, will be accounted for in FY25 by the government.

In absolute terms, the Centre's fiscal deficit target for FY25 stands at ₹16.13 trillion.

Also read | Centre may target fiscal deficit range of 3.7-4.3% post FY26

India's fiscal deficit for the period of April to November 2024 was  ₹8.47 trillion, which is 52.5% of the full-year target of ₹16.13 trillion, lower than the ₹9.07 trillion deficit in the same period in 2023.

A finance ministry spokesperson did not respond to emailed queries.

Bettering the target

Fiscal deficit for FY22 was 6.8%, according to revised budget estimates. Since then, it has steadily decreased each year, with the Centre surpassing its deficit targets in the past two fiscal years. In FY24, the deficit was reduced from a revised estimate of 5.8% to 5.6%, and in FY25, it is estimated to drop from 5.1% to 4.9%.

To be sure, the original fiscal deficit target for FY21 was 3.5%, but this shot up to 9.1% due to the pandemic outbreak that year that required heavy government spending.

In a recent report, rating agency Care Edge projected the Centre's fiscal deficit for FY25 at 4.8% of GDP, slightly below the budgeted estimate of 4.9%.

Meanwhile, rating agency Icra expects fiscal deficit to mildly trail the budgeted level of 4.9% of GDP.

Also read | Budget 2024: Strong revenue growth to help lower FY25 fiscal deficit to 4.9%

"The recent double-tranche of tax devolution to the states suggests the Centre's intention to expedite spending and support growth. However, it appears that spending will undershoot the budgeted target, especially on account of capex," said Aditi Nayar, chief economist, Icra.

"Revenues will get a boost from the RBI dividend, even as some other streams may trail the budgeted level. Nominal GDP has now been revised lower. On balance, we expect the fiscal deficit to mildly trail the budgeted level of 4.9% of GDP," Nayar added.

Catch all the Business News, Market News, Breaking News Events and Latest News Updates on Live Mint. Download The Mint News App to get Daily Market Updates.
more

topics

MINT SPECIALS