Interim Budget: Fiscal deficit target may be set at 5.3% in FY25, say experts

2024-01-11 18:53:29

The government will set a fiscal deficit target of 5.3% in FY25, keeping in view the fiscal consolidation path till FY26, as it normalises capital spending and refrains from any major announcements in the interim budget before the general elections, said Icra and Barclays economists, Thursday.

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“…major policy changes and announcements are unlikely. ICRA expects the fiscal deficit target for FY25 to be set at 5.3% of GDP, midway through the expected print of 6% for FY24 and the medium-term target of sub-4.5% by FY26,” said Aditi Nayar, chief economist, Icra. India has set a target of 5.9% fiscal deficit for FY24. Nayar said the government will also have to curtail its capital spending, as Icra forecasts the government to keep a capex target of ₹10.2 lakh crore in FY25.

“A higher capex target would impinge on the GoI’s ability to bridge half the required fiscal consolidation in FY2025, thereby making the task of reaching medium-term fiscal deficit target by FY2026 even more challenging,” Nayar said.

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The capex spending in the first eight months of the year was 59.6% higher than the previous year, with the government spending 58.5% of the ₹10 lakh crore target for FY24. “While a focus on supporting growth via capex is likely to be maintained, we expect the pace of spending to slow in the FY25 budget. The distribution of capex is likely to be largely towards railways, roads, civil aviation and defence,” said Rahul Bajoria, MD & Head of EM Asia (ex-China) Economics, Barclays. Barclays noted that the government will likely increase budgetary allocations for capex-only loans to state governments to ₹1.5 lakh crore in FY25, from ₹1.3 lakh crore announced in FY24 budget. However, it said that “the capacity utilisation of states to undertake more spending on infrastructure projects may be nearing its limits.” Barclays expects fiscal consolidation to be led by increased tax revenues rather than any material cutback in expenditure.

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On the tax front, Bajoria projected 15% growth in tax and non-tax revenues in FY25, with the subsidy bill remaining high in the coming fiscal as well. “With food and LPG subsidy spending plans for the next fiscal year already announced, we expect the total subsidy bill to remain elevated in FY25,” said Bajoria.

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