No reason for govt to deviate from medium-term fiscal deficit path, says source

For the current year, the Centre is targeting a fiscal deficit of 5.9 percent of GDP

There is no reason for the government to deviate from its stated glide path for reducing fiscal deficit, according to a government official.

The Centre - which the source said will meet this year's fiscal deficit target of 5.9 percent of GDP as things stand now - is looking to reduce the deficit to under 4.5 percent of GDP by 2025-26.

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"As on date, receipts seem to be going as predicted. Expenditures are also as predicted. So, let me say that I don't have any reasons to believe that we would not be meeting it (2023-24 fiscal deficit target), based on the information available to us now," the official added further, requesting anonymity as they are not permitted to speak to the media.

As per latest available data, government's fiscal deficit stood at Rs 6.43 lakh crore in April-August, or 36.0 percent of the full-year target. August also saw a big jump in corporate tax collections to Rs 62,817 crore, while personal income tax collections more than quadrupled to Rs 1.03 lakh crore.

Also Read: Centre's FY24 finances get unexpected boost from direct tax collections in August

In April-August, the Centre's capital expenditure stood at Rs 3.74 lakh crore, posting an year-on-year growth of 48 percent. According to the official quoted above, the capex figure has now crossed the Rs 5-lakh-crore mark.

Bond yield concerns

While the Centre's fiscal deficit has been making smooth progress this year, concerns have been raised about its borrowing cost in recent days after a surge in government bond yields following the Reserve Bank of India's (RBI) comments that it is likely to hold open market sales of securities to suck out excess liquidity from the banking system.

India's benchmark 10-year government bond closed at 7.38 percent on October 23, having risen by 20 basis points in the last one month, partially fueled by the sharp rise in US Treasury yields and fresh geopolitical tensions.

According to the aforementioned official, the government has to "learn to live with the unpredictability". However, it remains "very cautious about unexplained spikes" in bond yields.

"But I would not say it's much of a concern right now because we have also seen low yields. So we are watching things... If they go beyond tolerance levels, we will take appropriate remedial measures. So far, we are fine with it," the official said, without specifying what the government's tolerance level is.

As for what remedial measures the government may take should yields rise too much, the source did not elaborate, although the government and the RBI have previously rejected bids at the weekly bond auctions if they were outside the comfort zone.

A rejection of bids at the weekly bond auction is widely seen as an indication of the government's comfort with interest rates in the government securities market.

Commenting further on the financing of the government's fiscal deficit, the official expressed satisfaction at the small savings mop-up, with net collections under the Senior Citizen Savings Scheme at Rs 74,675 crore in the first half of 2023-24.

Also Read: Fin Min leaves H2 FY24 market borrowing plan unchanged

The central government funds its fiscal deficit through a mix of borrowings from the bond market, proceeds from small savings schemes, and the draw down of its cash balance.