Govt may revise fiscal deficit target to 5% of GDP in Budget

NEW DELHI: The full budget for FY25 may see a downward revision of India’s fiscal deficit target for the current financial year from previous target of 5.1% of the gross domestic product (GDP) to at least 5% or less as North Block swings into action to translate Prime Minister Narendra Modi’s development agenda into budget proposals, three people aware of the development said.

The finance ministry is ready with the basic structure of the budget, continuing efforts undertaken over the past decade.

While some tweaking in the budget proposals is still possible, no fundamental changes are expected in the National Democratic Alliance government’s economic strategy, they added, requesting anonymity.

The people expect the full budget for 2024-25 to be presented in Parliament about a month after the swearing-in that took place on Sunday. “The budget will be presented in July depending on the commencement of the session,” one of them said.

A second person added that this will most likely be in “the second week of July“.

The finance ministry did not respond to an email query on this matter.

“The political direction is absolutely clear so far as the first budget of the new government is concerned – to make India the third largest economy of the world within next five years. Hence, the budget will continue to focus on welfare schemes for the underprivileged, raising farmers’ income, development for-and-by women and young people, with micro, small and medium enterprises to act as engines of economic growth,” the first person said.

Based on continued revenue buoyancy and focus on prudent expenditure management, the government is expecting stronger fiscal consolidation, the second person said. “India’s economic foundation is so strong that the fiscal deficit target for 2024-25 could be revised up to 300 basis points,” he said. One basis point is one hundredth of a percentage point.

“It could be brought down to 4.8% in FY25, as of now. That is the kind of the elbow room we have, but a final call will be taken by the competent authority. Fiscal deficit target for the current fiscal year would also depend on new expenditure plans by the coalition government. But it is unlikely to cross the 5% mark,” he added.

While presenting the interim budget for FY25 on February 1 this year, finance minister Nirmala Sitharaman revised the fiscal deficit estimate for previous financial year (FY24) from 5.9% of GDP to 5.8% and set a target of 5.1% for the current financial year. But, according to data released by the Controller General of Accounts (CGA) on May 31, India’s fiscal deficit for 2023-24 came to 5.63%, substantially below the revised estimate (RE) made in the budget on February 1.

“A fiscal deficit number will be finalised soon after factoring in allocations for any new scheme the government announces in the budget,” a third person said. One of the poll-promises of the National Democratic Alliance (NDA) was to extend the free health insurance under the Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana (AB-PMJAY) to all citizens of over 70 years of age. AB-PMJAY currently provides cashless and paper less benefit cover of ₹5 lakh per annum per poor family on floater basis in the empanelled hospitals covering about 12 crore families with a budgetary allocation of ₹7,500 crore. Besides, the government may also enhance allocations for some of its flagship schemes such as PM Awas Yojana (an expansion of this was announced Monday) and the Mudra Yojana. “The government has pledged to enhance coverage under these schemes in the current financial year itself,” the third person added.

The government is keen to strengthen economy with prudent fiscal management, according to the people mentioned above. This will improve India’s credit rating. “Better ratings would mean easy and cheaper credits for infrastructure projects and developmental works,” the first person said. The US-based S&P Global Ratings on May 29 upgraded India’s sovereign rating outlook to positive from stable on robust growth, improved quality of public spending in last five years and expectation of broad continuity in reforms and fiscal policies. Experts said the government is in a comfortable fiscal position and it may even advance the path of fiscal consolidation due to tax buoyancy and economic growth. Sitharaman in her budget speech for 2021-22 envisaged reducing fiscal deficit below 4.5% by 2025-26.

“Going ahead, we expect buoyancy in tax collections to continue supported by factors such as better compliance and encouraging economic growth prospects. Furthermore, RBI’s higher than budgeted dividend [ ₹2.1 lakh crore] transfer is also expected to boost the government’s non-tax revenues for FY25… This is likely to support the moderation in fiscal deficit roughly to 4.8% of GDP (against the budgeted 5.1%),” said CareEdge Ratings chief economist Rajani Sinha.

Experts expect robust direct and indirect tax collections in FY25 to match with government’s capital expenditures. According to the official data released on June 1, India’s gross Goods and Services Tax (GST) collections in the first two months of current financial year was ₹3,83,006 crore, an 11.3% year-on-year growth mainly driven by a strong increase in domestic transactions.

On direct taxes, taxmen expect to repeat FY24 performance even in the current financial year on higher GDP growth. According to the official data released on April 21, gross direct tax collections for the 2023-24 was ₹23.37 lakh crore with 18.48% year-on-year growth. The National Statistical Office’s (NSO) on Friday projected that India’s GDP grew at 8.2% in 2023-24, higher than what was estimated by both the government and private forecasters. According to the Reserve Bank of India, the economy is expected to expand 7.2% in the current year.