Budget 2024: Govt lowers fiscal deficit target to 4.9% of GDP for FY25

New Delhi: The Centre has trimmed its fiscal deficit target for FY25 to 4.9% of GDP, significantly lower than the 5.1% target announced during the interim budget in February.

During her budget speech on Tuesday, finance minister Nirmala Sitharaman said the fiscal deficit target for 2024-25 will be about 200 basis points below the earlier estimate for the ongoing fiscal year. 

The government aims to reduce the fiscal deficit to 4.5% or less by FY26, maintaining its proposed fiscal glide path by financial year 2025-26.

On 23 May, Mint reported that the Centre would attempt to lower the fiscal deficit target for FY25 from 5.14% of gross domestic product (GDP) to 4.9-5%.

Fiscal deficit is the difference between the government's total revenue and total expenditure. It is an indication of the total borrowings that may be needed by the government. 

"From 2026-27 onwards our endeavour will be to keep fiscal deficit each year such that the central government's debt will be on a declining path as percentage of GDP," Sitharaman said.

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The lower fiscal deficit target follows the Reserve Bank of India's unprecedented dividend of   ₹2.11 trillion for the central government for FY24–141% higher than in FY23.

RBI's dividend payout will be instrumental in compensating for any slippages in tax revenue or increased public spending in FY25, and ensure fiscal deficit reduction is in sync with the committed glide path of 4.5% by FY26, experts said.

“The finance ministry should get an additional fiscal space of approximately ₹3 Lakh crores, emerging from RBI dividend, lower than expected fiscal deficit in FY24 and generous tax mop-ups,” said Debopam Chaudhuri, chief economist at Piramal Enterprises Ltd.

"This could go a long way in balancing political needs and economic optimization," he added.

To be sure, fiscal deficit as a share of GDP would also depend on the economic growth rate and the inflation trend, in addition to adjustments to spending and changes in receipts.

During FY24, gross personal income tax collection rose 24.3% to ₹12.01 trillion. Gross corporation tax mop-up was up 13.06% to ₹11.32 trillion during the fiscal year.

“The government surprised bond markets positively,” said Debopam Chaudhuri, chief economist of Piramal Group. “It was widely expected that the higher proceeds from non-tax revenues would be utilised to pacify political allies and rural voters. But, instead the finance ministry through a judicious manoeuvre, diverted bulk of the fiscal space to compress the deficit. The extra revenue spending (above interim budget estimates) was more target based rather than simple dole outs, which will raise its multiplier effect.”

"Maintenance of deficit glide path will aid India's case for a year upgrade, which in turn will benefit private borrowers with lower fund costs," he added

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