FM Sitharaman sets FY25 fiscal deficit target at 5.1%, goes aggressive on consolidation

The government has targeted a fiscal deficit of 5.1 percent of the GDP for 2024-25, according to the interim Budget presented by Finance Minister Nirmala Sitharaman on February 1, significantly surprising market expectations.

A Moneycontrol survey of economists expected the government to set a fiscal deficit target at 5.3 percent for the year starting April 1.

At 5.1 percent, the fiscal deficit target for next year is a huge 70 basis points lower than the current year's revised estimate of 5.8 percent. One basis point is a hundredth of a percentage point.

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In absolute terms, the fiscal deficit for 2024-25 is seen at Rs 16.85 lakh crore, with the number for 2023-24 lowered to Rs 17.35 lakh crore from the budget estimate of Rs 17.87 lakh crore.

"We continue on the path of fiscal consolidation, as announced in my Budget Speech for 2021-22, to reduce fiscal deficit below 4.5 percent by 2025-26," Sitharaman said in her speech in Parliament on February 1.

If the Indian government manages to meet its target for next year, it would mean that it would have to reduce it by a further 60 basis points in 2025-26 to achieve its medium-term target.

India's high fiscal deficit and public debt levels are widely considered as the key constraints to the economy's sovereign rating, with S&P Global Ratings' analysts saying in December that India needs to lower its annual deficit "a lot more" to get an upgrade.

"The starting point of India's fiscal performance has been very, very weak. And, even after the improvements that we have seen recently, the fact is it remains a very weak fiscal performance compared to the metrics that we are assessing it against," Kim Eng Tan, S&P managing director for APAC sovereign ratings, said on December 14.

S&P's assessment is shared by other global rating agencies, with Moody's Investors Service also requiring a fiscal deficit "much narrower" than 4.5 percent of GDP for it to reconsider its view on India's fiscal strength.

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All the three global ratings agencies — S&P, Moody's, and Fitch Ratings —  have assigned the lowest investment-grade rating for India.

However, it is likely that the government's aggressive compression of its deficit will be given a thumbs-up, with bond markets already surging.

"The first impression from the budget speech and fiscal deficit numbers for 2023-24 and 2024-25 suggests that the government is serious about achieving the fiscal consolidation path of 4.5 percent fiscal deficit by 2025-26," Devendra Kumar Pant, chief economist at India Ratings and Research, said.

Like other countries, India's fiscal deficit ballooned due to the coronavirus pandemic. However, the Centre has managed to reduce it rapidly from 9.2 percent in 2020-21.