There is a chance of fiscal slippage when campaigning kicks off for the 2024 general elections but the recent success in meeting deficit targets suggests the risk is smaller than has been the case previously, a senior economist said.
The Union Budget on February 1 pegged the fiscal deficit target for the next fiscal year at 5.9 percent of the gross domestic product (GDP) and stuck to the 6.4 percent of the GDP target for this fiscal year.
“Finance Minister Nirmala Sitharaman appears to have successfully demonstrated her long-term commitment of reining in the fiscal deficit while still providing support to the economy in today’s FY23/24 Union Budget announcement,” Shilan Shah, Senior India Economist at Capital Economics, said on February 1.
The minister also reiterated the target of lowering the difference between the government’s expenses and revenue to below 4.5 percent of the GDP by FY26.
“As campaigning ahead of the general election gets underway in earnest later in the year, there is a chance of fiscal slippage. But it is important to acknowledge the success that the finance ministry has had in achieving its deficit targets over the past couple of years. And by projecting a deficit that is still relatively large by historic standards, the target for FY23-24 looks credible to us,” he added.
Sticking to the medium-term target was needed to keep the public debt ratio sustainable, Shah said.
Also read: Budget 2023: Finance Minister Sitharaman strikes a fine balance. There's something for everyone
The rise in spending and income tax cuts announced in the budget have been enabled by a significant scaling back in the subsidy bill, Shah said.
Higher projections for goods and service tax collection – due largely to the streamlining of the online process – would also help to plug the gap, he added.
Still, the fiscal deficit for the next fiscal year would be substantially larger than was the norm prior to the coronavirus pandemic.
Capital Economics is sanguine about the monetary policy implications of the budget announcement.
The lack of a fiscal blowout, along with the recent drop in inflation and signs of a moderation in growth, should be enough to convince the rate-setting panel to further slow the pace of rate hikes next week and call an end to the tightening cycle, the research house said.
The Reserve Bank of India’s monetary policy committee will meet from February 6 to 8.
With bond yields remaining anchored, the budget supports its view that monetary easing could come onto the agenda later in the year, Capital Economics said.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
