Govt to work out path to 4.5% fiscal deficit target amid high expenditures till FY26: Official

The FY25 Budget is likely to see 40 to 50 percent more allocation for LPG subsidy. The FY24 LPG subsidy budget was at Rs 2,257 crore with an estimated Rs 9,200 crore additional allocation. The additional funds will be utilised for the Rs 300 per cylinder Ujwala Subsidy and for providing free LPG connections. Higher LPG subsidy and sales are also likely to see increased allocation in the FY25 Budget.

“The full-year expenditure impact of PMGKAY will be felt in the next fiscal. The Rs 300 per cylinder LPG subsidy expenditure impact will also be for the full year in FY25. New home loan interest subvention scheme will also be there next year for which the government is estimating a Rs 60,000 crore expenditure burden in five years,” he said.

The Centre will provide subsidised loans under the new home subvention scheme over the next five years. During his Independence Day speech, Prime Minister Narendra Modi announced the scheme for middle-class families residing in rented accommodation, chawls or tenements and illegal colonies in cities.

The government’s fertiliser subsidy in FY24 is now pegged at around Rs 1.88 lakh crore. Globally if the prices of urea, other fertilisers, and natural gas remain volatile going into the next year the high subsidy is likely to be extended well into FY25. The government may have to look at an elevated fertiliser subsidy expenditure next year as well.

Impact on India’s credit ratings

A sharp cut in fiscal deficit in FY25 by India is likely to impact its credit rating positively. According to S&P Global Ratings, India needs to lower its fiscal deficit "a lot more" if it wants to get an upgrade.

"Unless we see significantly more fiscal consolidation and bringing deficits down a lot more than what we have seen recently, we are unlikely to see further upside pressures on the rating," Kim Eng Tan, S&P managing director for APAC sovereign ratings, said on December 14, 2023.

A faster-than-targeted fall in the fiscal deficit will send a "very good signal", Reserve Bank of India's Monetary Policy Committee member Ashima Goyal told Moneycontrol on December 26.

"Steady reduction in government debt to East Asian levels will improve Indian ratings, reduce risk premiums and the cost of borrowing abroad," she said.

Meeting FY24 fiscal target

This year’s fiscal deficit target of 5.9 percent will be easily met despite the additional expenditures on high growth in revenue.

“Despite additional expenditures, as a percentage the government will meet the fiscal deficit target in FY24. There will be no deviation as this year we will manage to achieve it as oil prices are manageable. The additional expenditure impact in FY24 has been for a few months,” the official said.

Expert Speak

Going by the recent trends in both tax and non-tax revenues, the government is well in line to achieve the current year's target.

“With every projection suggesting a higher GDP growth prospects for India until 2028, it appears to be feasible to achieve a 4.5 percent fiscal deficit by FY2026.

However, there could be some risks in the next two years. Forthcoming general elections and global economic and political disturbances might push pressure on the fisc,” N R Bhanumurthy, vice-chancellor of Dr B R Ambedkar School of Economics University, Bengaluru, told Moneycontrol.

India Ratings has said that they expect the FY24 fiscal deficit to be at 6 percent mainly due to lower nominal GDP growth compared to the budget assumption.

ALSO READ: Higher spends on MGNREGA, subsidies to lead to some fiscal slippage in FY24: India Ratings

“Even from 5.9 percent in FY24, the fiscal deficit in two years has to be consolidated by 1.4 percentage points. Based on the experience of four decades, there have been four instances of achieving fiscal consolidation of more than 1.4 percentage points over a two-year period without fiscal expansion two years earlier. The task is difficult but can be achieved. Three important factors to achieve are sustained economic growth, revenue buoyancy and expenditure rationalisation,” Devendra Kumar Pant, Chief Economist, India Ratings, told Moneycontrol.

If we look at the data, India was on the fiscal consolidation path till 2019-20 at 4.6 percent, but pandemic pushed it to 9.2 percent in 2020-21.

“Post the pandemic period, the economic recovery is encouraging and the tax revenues have been buoyant. The only issue with the revenue projections is the disinvestment targets is too optimistic when the domestic and global economy is in a recovery cycle. On the expenditure side, the government’s went on a counter-cyclical investment spending path, the returns will be realised only in the medium to long run. The interest payments are huge worrisome factor, which have increased from Rs 8,05,499 crore in 2021-22 to Rs 10,79,971 crore in 2023-24. The government should focus on restricting of debt in such a way to reduce interest burden,” National Institute of Public Finance and Policy (NIPFP) economist Sri Hari Nayudu told Moneycontrol.

As far as the dividends from RBI and other public sector undertakings is concerned, the government in 2023-24 will be able to exceed the targeted Rs 91,000 crore.

“Given the scenario, expenditure rationalisation measures are the need of the hour to achieve fiscal consolidation path. This does not mean expenditure reduction. The government should review all the schemes and also administrative expenditures on different schemes to rationalise the schemes,” Nayudu added.