To meet the 4.5% fiscal deficit target set for FY 26, the government is looking to keep fiscal deficit at 5.1% of GDP in the next financial year
Finance Minister Nirmala Sitharaman's interim budget for 2024-25 indicates that the government will stick to the fiscal consolidation goal ahead of India's inclusion in global bond indices of JP Morgan and Bloomberg. Investors and economists were keenly watching the announcements on the fiscal health of Indian economy.
While estimates of several economists and global firms put fiscal deficit for FY25 between 5.2-5.4 per cent, Sitharaman announced in her sixth budget that the deficit will be cut down to 5.1 per cent of GDP in FY25. Moreover, the deficit for the current financial year is expected to be at 5.8 per cent, lower than the earlier estimate of 5.9 per cent.
During her speech to the parliament, the finance minister said, "We continue on the path of fiscal consolidation, as announced in my Budget Speech for 2021-22, to reduce fiscal deficit below 4.5 per cent by 2025-26."
Fiscal consolidation was in focus due to the boost in government spending on capital expenditure in the last few years. In the last budget, capex was raised by 33 per cent to Rs 10 lakh crore for FY24. However, the revised estimates show that the capex will be slightly below at Rs 9.5 lakh crore.
The capex outlay for the current financial year has been raised to Rs 11.1 lakh crore, a modest 11 per cent rise as compared to the previous year. As per economists, the government should continue to increase infra spending. "To address the challenges of deteriorating infrastructure, India must consider a more substantial increase in investment rather than a reduction," says Pradeep Gupta, Co-founder and Vice-chairman, Anand Rathi Group.
What has caught the eye of economists is the sharp focus on fiscal consolidation. Devendra Kumar Pant, Chief Economist and Senior Director at India Ratings and Research, says, " The first impression from the budget speech and fiscal deficit numbers for FY24 and FY25 suggests that the government is serious about achieving the fiscal consolidation path of 4.5 per cent fiscal deficit by FY26. The nominal GDP growth assumption and revenue buoyancy appears plausible and in line with our expectations."
As a result of the brake on fiscal deficit, the government will borrow less from the markets in the next financial year. Sitharaman said, "Net market borrowings through dated securities during 2024-25 are estimated at Rs 14.13 and 11.75 lakh crore respectively. Both will be less than that in 2023-24. Now that the private investments are happening at scale, the lower borrowings by the Central Government will facilitate larger availability of credit for the private sector."
In FY2023-24, the gross market borrowings was estimated to be at Rs 15.43 lakh crore. The reduction in borrowings is expected to have a positive impact on 10 year gilts according to market watchers.