Budget 2024: Low nominal growth could put India's fiscal deficit target under pressure

As per latest available data, the Centre's fiscal deficit in April-November 2023 stood at Rs 9.07 lakh crore, or 50.7 percent of the full-year target.

A sharp fall in nominal GDP growth in 2023-24 could make it difficult for the Indian government to meet its fiscal deficit target of 5.9 percent of GDP.

According to the statistics ministry's first advance estimate of GDP, released on January 5, India's nominal GDP growth – or GDP growth without adjusting for inflation – is set to plunge to 8.9 percent in 2023-24 – the lowest since the pandemic-hit year of 2020-21, and nearly half the 16.1 percent growth recorded in 2022-23. And while a fall was expected, it is also lower than the 10.5 percent the finance ministry had assumed in its budget numbers for the current year. A lower nominal GDP can cause issues for the government – both for 2023-24 and 2024-25.

While nominal growth is seen falling in 2023-24, the real - or inflation-adjusted - growth rate is set to increase to 7.3 percent from 7.2 percent.

Fiscal slippage concerns?

The budget for 2023-24 had assumed a nominal growth rate 10.5 percent over and above the first advance estimate of nominal GDP of Rs 273.08 lakh crore for 2022-23. This results in a nominal GDP of Rs 301.75 lakh crore, meaning that the projected fiscal deficit of Rs 17.87 lakh crore would fall to 5.9 percent of the GDP.

But with the statistics ministry now estimating that this year's nominal GDP may be Rs 5 lakh crore lower, at Rs 296.58 lakh crore, the fiscal math is at a slight risk.

Also Read: GDP growth-tax collections relationship is now complicated

As a percentage of the first advance estimate of nominal GDP, a fiscal deficit of Rs 17.87 lakh crore is 6.0 percent, around 10 basis points (bps) higher than the target. If the government still wants to meet its target of 5.9 percent of GDP, it would have to cut its fiscal deficit by nearly Rs 40,000 crore.

This is not the only risk to the fiscal deficit target for the year.

Disinvestment receipts have been disappointingly low, with only a fifth of the Rs 51,000 crore target being raised so far. However, there are also positives in the form of huge dividends from the Reserve Bank of India as well as public sector enterprises. Throw better-than-budgeted tax collections into the mix, and the situation is perhaps not all that difficult. According to Nomura economists, these factors – as well as the Centre's focus on expenditure consolidation in what’s left of 2023-24 – should help it meet the fiscal target.

Per latest available data, the Centre's fiscal deficit in April-November 2023 stood at Rs 9.07 lakh crore, or 50.7 percent of the full-year target.

What of next year?

As Moneycontrol has previously reported, the finance ministry may assume a nominal GDP growth rate of 11 percent for 2024-25 in the interim budget that Nirmala Sitharaman will present on February 1.

According to the International Monetary Fund's recent Article IV staff report, the Indian government remains committed to reducing its fiscal deficit to 4.5 percent of GDP by 2025-26.

"The adjustment will be implemented approximately evenly over 2024-25 and 2025-26," the IMF report said, suggesting that the interim budget may target a fiscal deficit of around 5.2 percent of GDP for next year.

As global ratings agencies have repeatedly pointed out, higher growth is key to consolidation of the Indian government's finances. Lower-than-expected nominal growth this year does add a pinch of uncertainty then.