It is common knowledge that India has struggled with its fiscal deficit in the past. Managing a high deficit has been a recurring concern. The most recent occurrence of a high deficit was due to the COVID-19 pandemic. To deal with the economic and social ramifications of the crisis, the government had to resort to subsidy programs, fiscal stimulus, and off-budget borrowings, all of which caused the fiscal deficit to surge to a whopping 9.2% of the GDP. However, the tide seems to be turning.

Source: Carnegie India

“India is steadily progressing towards fiscal consolidation”, affirmed Finance Minister Nirmala Sitharaman in the interim budget of February 2024. This statement flipped the narrative on the country's fiscal status - from deficit to prudence. Encouraged by the FY24 fiscal deficit number, which also came in lower than expected, the targets set for FY25 and FY26 are ambitious at 5.1% and 4.5%, respectively.

Source: Economic Times

 

Reasons for A Shift in India’s Fiscal Deficit Story

Safety and prudence in borrowing and managing debt is the clear rhetoric of the government. This is coupled with a consistent focus on controlling government spending, which was 14.9% of the GDP in 2023-2024, lower than the 15.37% recorded in 2022-2023. 

Moreover, tax collections have been improving continuously, exceeding government targets/budgets too. FY24 saw a 17.7% increase in income tax receipts. The government has pegged a 13% increase in income taxes in FY25. This provides us comfort beyond the macros - that India’s corporate health is not just surviving but thriving.

Source: Reuters, Business Times Singapore

The efforts to reduce fiscal deficit are being greeted by a record-high dividend cheque from India’s Central Bank the RBI of Rs. 2.11 lac crores or US$ 25 billion, making the fiscal consolidation job that much easier. This payout will enhance fiscal space and be used for various purposes such as reducing debt, funding infrastructure projects, etc.

 

Lower Fiscal Deficit: Implications on The Economy

Fiscal discipline on the part of the government is crucial for economic stability. It helps lower the risk associated with the excessive debt accumulation that a lot of peers and even advanced economies are suffering from.

The currency tends to be the biggest victim of an overleveraged national balance sheet. With a controlled borrowing programme, the Indian Rupee will be able to withstand external shocks or economic pressures without undergoing significant depreciation which will enhance foreign and domestic investor confidence

A lower fiscal deficit also gives the government some room to manoeuvre in terms of policy measures. This could include potential increases in spending on infrastructure or social programs.

 

What lies ahead?

The focus should be on intensifying efforts to maximise revenue from non-tax sources. This entails renewing efforts to meet targets for disinvestment, asset monetisation, and reducing stakes in public sector banks, among other initiatives. Efforts to enhance tax administration can lead to improved tax compliance and revenue collection. This includes enhancing coordination and information sharing between the boards of direct and indirect taxes. Simplifying and expediting the appeal process for tax disputes is also crucial, as it currently involves multiple stages.

Considering the increased RBI dividend and lower fiscal deficit for FY24 the government might have additional fiscal space available for FY25, even if it aims to precisely meet the interim budget target of 5.1% of GDP. There could be minimal risk of increased borrowing in FY25, and even achieving the fiscal deficit target of 4.5% of GDP for FY26 may not be in jeopardy. A strong fiscal balance ensures the necessary resources to stimulate demand, enhance India's economic resilience, maintain macroeconomic stability and propel the country towards its aspiration of becoming a significant economic powerhouse in the future.

India's past budget deficits reflect a combination of efforts towards fiscal consolidation and overcoming challenges. Reaffirming this commitment would reassure investors and credit rating agencies that the government is actively working towards improving its fiscal health.

 

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