The government may announce a fiscal deficit target of 5.3 percent of the GDP for 2024-25 on February 1, according to a Moneycontrol survey of 15 economists. A reduction in borrowing from the market to finance the deficit is also likely.
At 5.3 percent, the expected fiscal deficit target for the next financial year would be 60 basis points lower than the objective for 2023-24, which is widely believed to be met, despite higher-than-expected expenditure and lower nominal GDP growth, thanks to a rapid surge in tax collections.
One basis point is a hundredth of a percentage point.
Also read: GDP growth-tax collections relationship is now complicated
"Concerns surrounding fiscal slippage in an election year are understandable. However, we expect the Centre to meet their fiscal deficit target of 5.9 percent of GDP in 2023-24. For 2024-25, we see Centre's fiscal deficit to consolidate further to 5.3 percent of GDP, despite poll pressure," noted Aastha Gudwani, India economist at Bank of America Securities.
With the country set to go to polls in the next few months, the 2024-25 Budget will only be a vote-on-account. However, economists are not perturbed by the possibility that the full Budget will be presented in the second half of 2024 in July.
"While the 2024-25 budget is an 'interim' one ahead of the general elections due in April-May, we find that the fiscal targets in the interim and final budgets in the past two election years were largely similar. Hence, the government's fiscal intent is likely to remain largely unchanged in the final budget," according to Nomura economists Sonal Varma and Aurodeep Nandi.
Continued consolidation
With just two years left for the Centre to meet its medium-term fiscal deficit target of 4.5 percent, a sizeable reduction is expected in 2024-25. The economy's strong showing means economists also see room for the government to cut its spending a bit more to ensure the achievement of the fiscal target is not delayed.
| FY25 fiscal deficit (% of GDP) | FY25 gross borrow (in Rs lakh crore) | |
| ANZ | 5.4% | 16.0 |
| Bank of Baroda | 5.4-5.5% | 15.7-16.2 |
| Barclays | 5.3% | 15.5 |
| BofA Securities | 5.3% | 15.2 |
| CareEdge | 5.3% | 15-15.25 |
| DBS Bank | 5.3% | 15.1 |
| Elara Capital | 5.3% | 15.08 |
| Emkay Global Financial Services | 5.4% | 15.16 |
| ICICI Bank | 5.3% | 15.2 |
| ICRA | 5.3% | 15.0 |
| IDFC First Bank | 5.4% | 15.1 |
| India Ratings | 5.3% | 15.1 |
| Kotak Institutional Equities | 5.4% | 15.88 |
| Nomura | 5.3% | 15.16 |
| State Bank of India | 5.5% | 15.3 |
"A target of 5.2 percent of the GDP will give a real chance to achieve 4.5 percent in 2025-26, while 5.4 percent or 5.3 percent will almost surely postpone the target by at least one year to 2026-27," Nikhil Gupta and Tanisha Ladha, economists with Motilal Oswal Financial Services, wrote.
"Since the economic growth is very strong at this point in time, we feel that this is the best opportunity for the government to consolidate faster, and thus, recommend to target a fiscal deficit of 5.2 percent of GDP in 2024-25" they said.
The Indian economy has been growing faster than anyone anticipated, with the statistics ministry's first advance estimate pegging GDP growth in 2023-24 at 7.3 percent.
To finance its fiscal deficit, the Centre is expected to borrow around Rs 15.2 lakh crore in gross terms in 2024-25, down from the record Rs 15.43 lakh crore budgeted for the current financial year. In net terms – after adjusting for repayments for bonds maturing this year – the Union government's borrowing is seen at Rs 11.5 lakh crore, around Rs 30,000 crore lower than in 2023-24.
While the borrowing is set to remain at elevated levels, the demand-supply dynamics which determine the cost of borrowing are set to be very much in favour of the government thanks to the inclusion of Indian government bonds on JPMorgan's global indices starting June and maybe even Bloomberg's indices starting September. As such, bond yields – and other interest rates – could fall next year despite liquidity conditions tightening sharply.
"The favourable supply-demand dynamics and likely start of the RBI rate cut cycle will support the easing in 10-year government security yields to 6.8 percent in 2024-25," said Gaura Sen Gupta, India economist at IDFC First Bank.
Yield on the benchmark 10-year government bond was at 7.18 percent on January 25.
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