Interim Budget to stick with fiscal glide path, target 5

Interim Budget to stick with fiscal glide path, target 5.2% deficit in FY25

With buoyant revenues likely ensuring that the 5.9% fiscal deficit target is met in the current financial year, the Centre may target to bring it t down to 5.2% in FY25, while sticking with the medium-term glide path for 4.5% deficit by FY26.

However, this would entail compression of the revenue deficit, more sedate growth in capex than what was seen in the FY23, and FY24 Budget Estimate, as well as aggressive disinvestment, sources said.

While the Union government might try to maintain the capex at around 3% of GDP in FY25 from 3.3% budgeted in FY24, the revenue expenditure could be compressed to below 11%, from 11.6% in FY24 to accommodate a 70 bps reduction in fiscal deficit, they added.

“We anticipate that the FY25 budget will aim to bridge half the gap between the FY24 fiscal deficit and the medium-term target. Accordingly, we foresee the FY25 fiscal deficit to be targeted at around 5.2-5.3% of GDP,” said Icra chief economist Aditi Nayar.

The Centre has accelerated budget capex growth in recent years, with BE of Rs 10 trillion in FY24 being 3.3% of the GDP, much higher than 1.6% in FY19. To maintain the ratio with GDP in FY25, capex may grow by around 10% (assuming 10% nominal GDP growth) to close to Rs 10.95 trillion from Rs 10 trillion estimated for FY24. Many analysts including Nayar fear capex may miss the FY24 BE to some extent if the momentum slows ahead of the model code of conduct for general elections in April.

Going by the above estimates, the Centre’s total expenditure may rise to around Rs 47 trillion in FY25, an annual growth of 4.4% over FY24 BE, but much lower than the 14.2% estimated in FY24BE over FY23BE. This estimate suggests revenue expenditure to rise to Rs 36.18 trillion in FY25, up 3.4% on the year, as the Centre treads a cautious path without disturbing the current subsidies on food, fertiliser and fuel.

According to N R Bhanumurthy, Vice-Chancellor of Bengaluru’s BASE University, the Centre would be able to contain fiscal deficit below 5.9% in the current fiscal and could achieve 4.5% by FY26 on likely buoyant revenues provided there are no more big external shocks.

“From the 5.9% target for this year, if the government targets 5.2-5.3% fiscal deficit for the next financial year, that would be a decent number,” Bhanumurthy said. Even though disinvestment has not done well in the last few years, it would likely be on track going forward, Bhanumurthy said.

There are a lot of positive factors that have happened in recent months including moderation in crude prices, inflation better than assumed, real GDP growth better than assumed and world GDP growth better than assumed, he added.

“While we expect the GoI’s fiscal deficit to meet the absolute target enshrined in the FY24 BE, there may be a minor slippage in the deficit to GDP ratio on account of a slower than anticipated nominal GDP growth. Looking ahead, there is a fair bit of fiscal consolidation required to meet the target of 4.5% of GDP intended for FY2026,” Nayar said.

India Ratings also projects higher-than-budgeted revenue expenditure triggered through the first and likely second supplementary demand for grants in combination with lower-than-budgeted nominal GDP will push the fiscal deficit to 6% of GDP, 10bp higher than budgeted 5.9% in FY24. However, senior finance ministry officials have suggested that the deficit target for FY24 would be met through a combination of factors including savings in some planned expenditures.

Tax collections have been buoyant so far in FY24. India Rating expects net tax revenue (post devolution) collections to exceed the budgeted amount due to the widening of tax base, better enforcement of compliance and use of technology in the tax collection process. Net tax revenue during April-October 2023 has been Rs 13 trillion which is 59.6% of the FY24 budget estimate. “We expect it to reach INR 24.5 trillion in FY24 as against the budgeted INR 23.3 trillion, clocking a growth rate of 17.2% and helping tax/GDP ratio to reach 8.81% as against budgeted 7.72%”, India Rating chief economist DK Pant said. The Centre had budgeted net tax revenues to grow 11% in FY24 over actual of FY23.

Like tax revenue, non-tax revenue is expected to come in higher than the budgeted figure in FY24. Non-tax revenue is forecasted to reach Rs 3.7 trillion in FY24 as against the budgeted Rs 3 trillion. Non-tax revenue collections have been Rs 2.7 trillion during April-October 2023 which is 88.1% of the FY24 budgeted amount.