Centre to better medium term target for fiscal deficit

The interim budget presented in February had set fiscal deficit targets for FY25 and FY26 at 5.1% and 4.5% of GDP respectively, but the government is expected to cross these targets in the absence of any shock developments, the people cited above said on condition anonymity.

"The economy is doing well. We expect strong revenue buoyancy and prudent expenditure management to help us better the fiscal deficit targets for FY25 and FY26," one of the two people cited above said.

Also read |  India's FY24 fiscal deficit improves to 5.63% of GDP, lower than govt target

"To that extent, a target of 5% for FY25 and 4.3%-4.4% in FY26 is achievable if there aren't any major developments that deter the country's growth. These targets could even be bettered if the performance of the economy continues to be robust," the person said on condition of anonymity.

Deficit ratchets up debt

A higher fiscal deficit leads to a higher debt burden and greater spending on debt servicing, which strains the economy and risks devaluing the currency and impacting private investments.

"A major focus of the government is to continue on the path of fiscal consolidation," said the second person, adding the Centre plans to stick to most of the interim budget targets in the coming full budget. "While allocations to some of the welfare schemes could be increased and new schemes added, there is unlikely to be major changes in the numbers," the person said.

A finance ministry spokesperson didn't respond to emailed queries.

Also read |  What explains the record dividend by RBI for FY24

The central government's fiscal deficit in FY24 stood at 5.63%, marginally better than 5.8% estimated in the Union budget, according to data released by the Controller General of Accounts (CGA) last month, helped by a record ₹2.11 trillion Reserve Bank of India dividend, up 141% from the previous year.

The Centre had set a fiscal deficit target of 5.9% in FY24, 5.1% in FY25 and 4.5% in FY26. It revised the target for FY24 in the interim budget in February, only to beat it thanks to higher-than-anticipated receipts and lower-than-estimated revenue spending. During FY24, the government received  ₹27,88,872 crore (101.2% of corresponding revised estimates of total receipts).

The total expenditure incurred by the central government was  ₹44,42,542 crore (98.9% of corresponding revised estimates). Of this, ₹10,63,871 crore was used for interest payments and  ₹4,13,542 crore for major subsidies.

Interest payout may fall 

Experts said the Centre's interest payment may reduce in the next couple of years thanks to the additional RBI dividend as it pays off some of the public debt.

“The RBI has indicated that the higher dividend trend will continue next year, which will help provide cushion to better the 5.1% fiscal deficit target for FY24. Meanwhile, the non-tax revenue has shown surprise in FY24, and we expect positive surprises in the next couple of years largely from asset monetization and divestment. On the tax side, we are seeing surprise buoyancy in GST, which is expected to continue," said N.R. Bhanumurthy, vice-chancellor at Dr. B.R. Ambedkar School of Economics University, Bengaluru.

“These factors should help the Centre better its fiscal deficit target. However, I am of the view that the glide path shouldn't take fiscal deficit but public debt to GDP into account. The Centre should work towards reducing its public debt," he added.

Also read |  Unemployment and inflation call for revising budget priorities

In the interim budget in February, the Centre had raised the total allocation for infrastructure projects to  ₹11.11 trillion for FY25, up from  ₹9.50 trillion in the revised estimates for FY24.

Meanwhile, the total expenditure is expected at ₹30.80 trillion during FY25, down from ₹44.90 trillion (revised estimates) in FY24.

The Indian economy, the fastest-growing major economy, expanded at a blistering 8.2% in FY24, ably supported by January-March quarter growth of 7.8%. Recently, the RBI made an upward revision to the real GDP growth projection for FY25 to 7.2% from 7% projected earlier due to expectations of improving rural and urban demand conditions buoyed by better monsoon forecasts.