Interim budgets typically don't spring any surprises, with the big bang announcements left for the full budget that the new government will announce after the elections. Also being an election year, governments may tend to lean on the side of populism. However, Finance Minister Nirmala Sitharaman, on Thursday, presented a budget that maintains the focus on fiscal consolidation. Not only has the full-year fiscal deficit for 2023-24 been trimmed slightly, target for the next year is also lower than what many anticipated.
"We continue on the path of fiscal consolidation, as announced in my budget speech for 2021-22, to reduce fiscal deficit below 4.5 per cent by 2025-26," Sitharaman said.
Adhering to that path, the fiscal deficit for 2024-25 financial year has been pegged at 5.1 per cent of GDP.
For the current financial year, ending March 2024, the fiscal deficit target has been revised to 5.8 per cent of the GDP from the budgeted 5.9 per cent.
"When it comes to fiscal prudence, the budget has hit a six, when only a couple of runs were needed to win," opined Aurodeep Nandi, India economist at Nomura Holdings.
The sharp cut in the FY25 fiscal deficit target from the current year has surprised markets, which would have been happy to see it moderate to 5.2-5.4 per cent of GDP in a pre-election budget, he added.
How will the government finance the fiscal deficit? The gross and net market borrowings through dated securities in 2024-25 have been estimated at Rs 14.13 lakh crore and Rs 11.75 lakh crore respectively. Both will be less than that in the current financial year.
S&P Global Market Intelligence feels the fiscal deficit target for the next financial year is aggressive, considering a likely slowdown in overall growth and the difficulty in meeting the government's disinvestment targets.
"At this point, this is more of a signal that the government remains committed to reducing its budget deficit in line with its medium-term fiscal consolidation plan, with the actual fiscal deficit target likely to be revised in the final budget after the elections," it said.
Suman Chowdhury, chief economist and head of research at Acuite Ratings, also believes that the fiscal deficit target for next year is slightly ambitious.
"With the expected moderation in GDP growth in the next few quarters, there is a likelihood of a lower tax revenue growth and the dependence on non-tax revenues like disinvestment will be clearly higher," said Chowdhury.
The likelihood of high ticket disinvestments therefore has significantly increased for the next fiscal if the current government is reinstated back to power, he added.
Unfortunately, the government has missed disinvestment targets for the last few years and this year ending March 2024 may be no different. According to data from DIPAM (Department of Investment and Public Asset Management), the government has thus far only managed to garner Rs 12,504 crore from divestment in 2023-24, compared with the budgeted target of Rs 51,000 crore.
The government has now revised the divestment target for 2023-24 to Rs 30,000 crore and has set a target of Rs 50,000 crore for 2024-25.
Pranjul Bhandari, chief economist, India and Indonesia at HSBC, says the fiscal math is credible.
"For FY25, the government has budgeted a 0.1 per cent of GDP rise in revenues, led by higher net taxes. On the expenditure front, it aims to lower the subsidy bill and other current expenditure by a total of 0.8 per cent of GDP. On the other hand, it aims to raise capex by 0.2 per cent of GDP, marking an overall cut in expenditure of 0.6 per cent of GDP. With higher revenue and lower expenditure, it aims to lower the fiscal deficit by 0.7 per cent of GDP," noted Bhandari.
The fiscal target for 2024-25 translates into a lower gross market borrowing figure than expected and is likely to be positive for the bond market, said Abheek Barua, chief economist and executive vice-president at HDFC Bank.