Economy
The math of how the Centre plans to cut fiscal deficit, explained
Summary
- The Centre stayed put on the fiscal consolidation path, aiming to bring the deficit down to 5.1% in 2024-25. Reducing revenue expenditure as a share of GDP is the key factor behind this.
In its last budget ahead of the 2024 general elections, the Centre stayed put on its fiscal consolidation path, aiming for a fiscal deficit of 5.1% of GDP in 2024-25, down 71 basis points from the current fiscal year.
In absolute terms, the fiscal deficit is estimated to fall to ₹16.9 trillion from ₹17.4 trillion. Yet, the ambitious curtailment in GDP terms comes on the back of an assumption of an improvement in the growth rate of the economy itself.
The budget has been framed with the hope that the economy will grow 10.5% (in nominal terms) in 2024-25, faster than the 8.9% growth estimated for the current fiscal year. Since the fiscal deficit is typically expressed as a percentage of GDP, this will help lower that figure.
A breakdown of key budget components shows that the decline in fiscal deficit is mainly relying on the back of lower spending as a share of GDP, with only a small increase in revenue.
The Centre aims to spend 14.5% of GDP in 2024-25 as against 15.1% in the current financial year. The revenue expenditure component is set to see a sharp cut to 11.2% of GDP in 2024-25, down from 11.9% in the current fiscal year. Capital expenditure, on the other hand, is estimated to increase to 3.4% of GDP in 2024-25 from 3.2% of GDP in 2023-24.
It must be noted that most of these figures have increased in absolute terms. A decrease is possible as a share of GDP when the figure grows slower than the economy is expected to grow.
Analysts at Icra said the capital expenditure allocation was higher than it had expected ( ₹9.5 trillion for 2023-24, against a projection of ₹9.3 trillion, and ₹11.1 trillion, against a projection of ₹10.2 trillion) and the fiscal deficit was more ambitious that its projections (5.8% for 2023-24, against a prediction of 6.0% for 2023-24, and 5.1% for 2024-25, against a prediction of 5.3%).
“The higher-than-expected capex and lower-than-projected fiscal deficit suggest that the quality of expenditure is going to be healthier," said Aditi Nayar, chief economist at Icra Ltd.
Even as gross tax collections are estimated to grow higher than the nominal GDP growth, the share of total receipts is estimated to rise only modestly from 9.3% of GDP to 9.4%.
The Union Budget announcement of a reduced fiscal deficit of 5.1% of GDP in 2024-25 makes it easier for the Centre to move towards its target of 4.5% by 2025-26. That would imply a 64-basis-point reduction in the next Budget.
To be sure, the Budget presented today was an interim one. The full-year Budget will be revealed in July following the General Elections due in April and May. However, a Mint analysis of recent election year budgets showed minimal variation between the interim budget and the main one, particularly when the incumbent government retained power.
