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'Highly doable' for Centre to cut fiscal deficit to 4.5% of GDP by FY26: MPC's Ashima Goyal

While the latest data shows the Indian government is on track to meet the fiscal deficit target for the current financial year, questions have been raised about whether the medium-term target of 4.5 percent will be achieved

November 25, 2022 / 11:46 AM IST
Ashima Goyal

Ashima Goyal

It is "highly doable" for the Centre to lower its fiscal deficit to 4.5 percent of GDP by 2025-26, Ashima Goyal, an external member of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has said.

"In emerging markets, you have much higher growth rates. If your G (growth rate) is greater than your R, your real interest rate, then the denominator is rising and the (fiscal) deficit, debt ratios, everything comes down," Goyal said on November 24 while speaking at State Bank of India's Banking and Economics Conclave.

"So as long as growth is greater than R, there is not too much volatility in R, there is not too much volatility in the exchange rate, that is going to bring down deficits and debt. So this 2 percent reduction, whatever it is, is highly doable,” Goyal added.

The Indian government has set itself a medium-term fiscal consolidation target of lowering the annual fiscal deficit to below 4.5 percent of GDP by 2025-26. With the Centre's target set at 6.4 percent of GDP for the current financial year, the fiscal deficit must be cut by 190 basis points over the next three financial years.

As per the latest data available from the Controller General of Accounts, the Centre's fiscal deficit stood at 37 percent of the full-year target in the first half of 2022-23, indicating it is well on track to meet this year's aim.

However, questions have been raised about the medium-term target of 4.5 percent, with Fitch Ratings recently saying the lack of clarity on the revenue and expenditure dynamics during the consolidation phase meant it does not expect the Centre to meet this goal.

In her comments today, Ashima Goyal said India was in a "very good position" when it came to the government’s finances.

"Fiscal consolidation in today's environment – we had a lot of analysts during the pandemic saying 'follow the US, spend more, fiscal should spend more'. Now the same people are saying 'fiscal consolidation'. We are in a position to have that fiscal consolidation happen normally, gradually."

When asked if the government will be able to negotiate a sizeable cut in the fiscal deficit for 2023-24 in the 2023 Budget, which is expected to be presented on February 1, Goyal said that while you can't "negotiate anything in politics", India's tax buoyancy and higher nominal GDP growth, among other factors, suggested it is "highly feasible".

"Fiscal policy has been very intelligent and adaptive to Indian conditions in the sense that intervention in the food economy has helped with inflation in this period of the Ukraine war when food and oil (prices have risen)... And raising oil taxes when oil prices crashed, so now there is room to lower it. So this cost the fisc some, but it reduced inflation and allowed real rates to stay low," she said.

Speaking on the rupee, the rate-setter said the Indian currency "will depreciate a bit" to 83 per dollar or so in the first half of 2023, but should strengthen after that.

"…some research we have done suggests that if we look at structural factors, India's real exchange rate is appreciating. So those should take the market back after all this volatility."
Siddharth Upasani is a Special Correspondent at Moneycontrol. He has been covering the Indian economy, economic data, and monetary and fiscal policies for nine years. He tweets at @SiddharthUbiWan. Contact: siddharth.upasani@nw18.com
first published: Nov 24, 2022 06:57 pm