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Informist, Wednesday, Nov. 27, 2024

 

NEW DELHI – Significant slippage in government expenditure and better-than-budgeted tax revenues will likely help the government lower its fiscal deficit in 2024-25 (Apr-Mar) to 4.75% of GDP, 19 basis points lower than the Budget estimate of 4.94%, India Ratings and Research said in a report Wednesday. A lower fiscal deficit in FY25 will make it easier for the government to achieve its FY26 fiscal deficit target of 4.5%, it said. The fiscal deficit in the first half of 2024-25 accounted for 29.4% of the target of INR 16.133 trillion set in the Union Budget for FY25.

 

The tax-to-GDP ratio in FY25 will likely be higher than the Budget estimate, India Ratings Chief Economist and Head of Public Finance Devendra Kumar Pant said. The Budget had projected the central government's gross tax collections for FY25 at INR 38.40 trillion, up 10.8% from last year and 11.77% of FY25 GDP. The rating agency expects the tax-to-GDP ratio for FY25 to be 12.02%. Considering the nominal GDP growth for FY25 is pegged at 10.5%, the Budget had assumed a tax buoyancy of 1.03.

 

The government's tax collections in Apr-Sept rose 12.0% on year to INR 18.138 trillion on the back of a 25.0% increase in income tax collections. As per the latest data, income tax and corporate tax collections in Apr-Sept were INR 5.645 trillion and INR 4.615 trillion, respectively. Though growth in income tax collections was robust, corporate tax collections rose only 2.3% during the first six months of FY25. 

 

India Ratings said that income and corporate tax are estimated to contribute 80.94% and 10.53%, respectively, to the additional gross tax revenue. "Based on the 1HFY25 (Apr-Sept) growth rate, corporate tax collection growth in 2HFY25 (Oct-Mar) appears to be optimistic," it said.

 

Higher direct tax collections will offset the shortfall in customs and excise duty collections, while goods and service tax collections will be broadly the same as FY25 Budget projections, the report said. The rating agency sees customs duty collections to be INR 143.52 billion lower than the Budget estimate of INR 2.377 trillion and excise duty collections to be INR 163.67 billion lower than the estimate of INR 3.190 trillion. GST collections in FY25 are expected to grow 11% on year compared with the growth of 10.8% in Apr-Sept. 

 

Though tax revenue is buoyant, the India Ratings said that non-tax revenues and disinvestments will be a drag in FY25. 

 

On the expenditure side, the report said that slippage is expected in both revenue and capital expenditure targets. India Ratings expects FY25 revenue expenditure, excluding subsidies, to be 12 bps of GDP lower than the Budget estimates, it said. The Budget had projected revenue expenditure, excluding subsidies, at INR 32.810 trillion rupees or 10.05% of GDP in FY25.

 

Capital expenditure this year has been under the scanner as it has been tepid in FY25 due to the General Elections. The rating agency sees the capital expenditure in FY25 to be INR 621.46 billion lower than the Budget estimate of INR 11.11 trillion.

 

Till September, the government spent only 37% of the capital expenditure target. The government's capital expenditure in Apr-Sept fell 15.4% on year to INR 4.15 trillion. The government needs to spend INR 6.96 trillion in six months to meet the capital expenditure target for the year, "which appears to be a daunting task," India Ratings said.

 

As the government firms up its Budget for FY26, which will likely be presented on Feb. 1, India Ratings said that the government may decide to use the fiscal space created by the lower expenditure to either reduce the fiscal deficit for FY25 or take up additional expenditure in certain sectors which require some support. 

 

The government's fiscal deficit rose to an all-time high of 9.2% of GDP in the pandemic-hit year of 2020-21. In 2021, the government laid out a fiscal consolidation roadmap, under which it set a target to bring down the fiscal deficit to below 4.5% of GDP by 2025-26. Now that the 4.5?ficit target is at a hand's reach, the government has reoriented its focus on not just the reduction of fiscal deficit but a sustainable decline of the government's debt-to-GDP ratio as well.  End

 

Reported by Priyasmita Dutta

Edited by Saji George Titus

 

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