Centre’s fiscal outlook isn’t rosy

The new glide path of 4.5% for 2025–2026 is way behind the original fiscal deficit target. The least the government could do is aim for a 3% fiscal deficit by 2025-2026.

In the Union Budget 2024, the government has set a fiscal deficit target of 4.9 per cent of the gross domestic product, which is 0.2 per cent less than the 5.1 per cent target fixed in the Interim Budget. In fixing that target, the finance minister had assumed a dividend receipt of Rs 80,000 crore from the Reserve Bank of India from the latter’s operations during the financial year 2023-2024 to be available for use by the Centre during the FY 2024-2025. 

In May, the RBI approved a mammoth dividend transfer of Rs 210,000 crore to the Centre, which is Rs 130,000 crore higher than the provision of Rs 80,000 crore in the Interim Budget. Taking nominal GDP of around Rs 330,00,000 crore, this yields a cushion of around 0.4 per cent of the GDP. This has helped the finance minister reduce fiscal deficit by 0.2 per cent to 4.9 per cent. 

With this, the government may appear to be well on course to achieve the fiscal deficit target of 4.5 per cent by next year, i.e., FY 2025-2026. The fact that the Centre hasn’t deviated from its fiscal consolidation roadmap while maintaining the tempo of capital expenditure (at Rs 11 lakh crore, the capital outlay for FY 2024-2025 is 17 per cent higher than during 2023-2024) does not make the picture any rosier.

In the amendment to the Fiscal Responsibility and Budget Management (FRBM) Act through the Finance Bill 2018-2019, the Modi government had pledged to achieve a fiscal deficit of 3 per cent by 2020-2021. However, following the Covid-19 pandemic, it revised this fiscal glide path. In the Budget for FY 2021-2022, the government reset the fiscal deficit target to 4.5 per cent by FY 2025-2026 (instead of the original target year of 2020-2021).

The pandemic was a once-in-a-lifetime event. Its impact was transitory, and it won’t be logical to use it as a basis for altering the medium-term fiscal trajectory. This is all the more true when, from 2021–2022 onward, the economic situation was more or less back to normal. During that year, the fiscal deficit was 6.7 per cent, followed by 6.4 per cent in 2022-2023 and 5.6 per cent in 2023-2024. It could have done better. 

The new glide path of 4.5 per cent for 2025–2026 is way behind the original fiscal deficit target. The least the government could do is aim for a 3 per cent fiscal deficit by 2025-2026. 

It won’t be easy to achieve the 4.9 per cent target during the current year. This is because the gross tax revenue (GTR) target of Rs 3,840,000 crore is over-ambitious and the Budget assumes receipts of Rs 50,000 crore from disinvestment of government shares in PSUs, a programme it has decided not to pursue. Even major expenditure items could get out of control as the year progresses. 

For instance, fertiliser subsidy is budgeted at Rs 164,000 crore during 2024–2025. This is based on the assumption that the declining trend in the international price of fertilisers and raw materials used in their production seen during 2023–2024 continues during the current year as well. It takes a small disruption in the global supply chain (which is quite likely given the current highly uncertain geopolitical situation) for this assumption to go wrong. 

To go from 4.9 per cent (assuming this is done) to 3 per cent next year can be daunting, especially as the RBI is unlikely to repeat its bonanza/gift to the Centre. During 2023-2024, there was a surge in the RBI’s interest income from foreign currency assets (FCA) and exchange gain from foreign exchange transactions. According to the State Bank of India, these two factors alone accounted for 60-70 per cent of the increase in income from Rs 235,000 crore during 2022-2023 to around Rs 400,000 crore during 2023-2024. This, in turn, was due to a sharp hike in interest rates by the United States Federal Reserve and other central banks of developed countries to rein in inflation. But, as the US Fed is expected to move the interest rate south from the latter half of 2024, the RBI will not be able to sustain high earnings. 

During an interaction with the press, Finance Minister Nirmala Sitharaman has alluded to the Centre’s plan to design fiscal trajectory in a manner such that from FY 2026–2027 onward, its debt to GDP ratio starts declining. Without target setting, this is unlikely to instil confidence. Yet, Sitharaman won’t
set the target, as these are often missed. The Centre’s debt-to-GDP ratio is currently around 57 per cent, against the mandated 40% for 2024-2025 under the FRBM Amendment Act (2018). 

(The writer is a policy analyst)