Icra sees budget pegging fiscal deficit at 4.9-5%
With the Indian Finance Minister Nirmala Sitharaman set to present the full budget, expectations are high for a favorable fiscal outcome, largely due to a record dividend from the central bank. The significant inflow from the Reserve Bank of India (RBI), amounting to Rs 2.11 trillion, is anticipated to allow for a more manageable fiscal deficit target of 4.9-5 percent for the fiscal year, a slight improvement from the interim budget’s projection of 5.1 percent of GDP.
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This advantageous fiscal position is unlikely to affect the ambitious capital expenditure (capex) goal of Rs 11.1 trillion, maintaining the government’s focus on spurring economic growth through substantial investments in infrastructure and development projects. According to Icra Ratings, this financial leeway could lead to a substantive reduction in net market borrowings, by an estimated Rs 350-550 billion compared to the interim budget’s estimate of Rs 11.8 trillion, which would positively influence market yields and bolster the appeal of government securities (G-secs), especially in light of their recent inclusion in the JP Morgan bond index.
The upcoming budget is also expected to present an optimistic revision of revenue receipts by Rs 1.2 trillion for FY25, while projecting a relatively modest increase in revenue expenditure targets, focusing primarily on the rural economy. Such fiscal maneuvering, however, poses challenges for further consolidation efforts over the next three to four years, particularly when considering the scale of off-budget capex brought onto the books in the previous fiscal years.
The boost in government revenue is partly attributed to higher tax collections and the unprecedented dividend from the RBI. This financial boon provides the government with an additional Rs 1.2 trillion. Initial estimates had placed gross tax revenue for FY24 at a level that suggested a dampened growth forecast for FY25 at 10.6 percent, slightly below the forecasted nominal GDP growth of 10.8 percent. In light of this, Icra anticipates a potential upward revision in tax collections by Rs 400-450 billion in the revised budget estimates, thereby exceeding net tax revenues by Rs 200 billion. The significant dividend from the RBI is also expected to lead to a considerable upward revision in non-tax revenue estimates, further strengthening the government’s fiscal position.
As the government continues to navigate the complexities of India’s fiscal landscape, these strategic adjustments and unexpected financial gains could play a critical role in shaping the country’s economic trajectory. The focus on maintaining a balanced fiscal approach while pursuing aggressive growth initiatives underscores the challenges and opportunities that lie ahead in India’s journey towards sustainable development and fiscal prudence.
