Can nominal growth slip cast a shadow on fiscal deficit?

Nominal growth slip could prove costly

India’s GDP growth likely declined to a four-year low of 6.4 percent for FY25 against 8.2 percent in the previous year, data released by the government on January 7 showed.

India’s nominal growth may have dipped to 9.7 percent in FY25, a tad higher than the previous year’s number of 9.6 percent but lower than the budget target of 10.5 percent.

A lower nominal GDP is also expected to cast a shadow on the fiscal deficit calculation. The government had projected a nominal GDP of Rs 326.37 lakh crore for FY25 but the first advance estimate pegs the number at Rs 324.11 lakh crore.

If the government does incur a deficit of Rs 16.13 lakh crore, the fiscal deficit may slip to 5 percent of the GDP as against the budget target of 4.9 percent. Despite the slip in nominal growth, experts indicate fiscal deficit will likely be contained at 4.9 percent, as low capital spending is expected to keep the target in check.

"This is unlikely to have a significant impact on fiscal consolidation in FY25 due to the current revenue and expenditure pattern of union government," said Paras Jasrai, senior analyst, India Ratings and Research.

Data released in December showed that capital spending was 12 percentage points below last year’s numbers for the April-October period.

"In this case, the fiscal deficit magnitude may fall only if the central government is not able to meet its budgeted expenditure target particularly for capital expenditures. This has shown a contraction of (-)12.3 percent even after eight months into the fiscal year. We expect that the budgeted fiscal deficit relative to GDP at 4.9 percent may not be affected much as its magnitude will go down but the nominal GDP magnitude is also expected to go down," said DK Srivastava, Chief Policy Advisor, EY India

India’s capex reached 46.2 percent of its target of Rs 11.1 lakh crore between April and November, compared with 58.5 percent spent in the previous year.

Srivastava expects a better performance on the nominal growth front for the coming year.

"We expect that the budget may assume a 10.5 percent nominal GDP growth for 2025-26 consisting of 6.5 percent of real GDP growth and near 4% of IPD based inflation. The likely target for fiscal deficit in 2025-26 may be 4.4 percent of GDP which may be accompanied by a fall in the debt GDP ratio thereby confirming continued progress in fiscal consolidation," he added.