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Informist, Monday, Jan. 27, 2025

 

By Shubham Rana

 

NEW DELHI - The Union Budget for 2025-26 (Apr-Mar) will mark the culmination of the government's five-year fiscal consolidation road map with Finance Minister Nirmala Sitharaman expected to announce a fiscal deficit target of 4.5% of GDP for next year, according to an Informist poll of 24 economists. Sitharaman will present the Budget on Saturday.

 

According to the poll, the government is likely to bring down the fiscal deficit to 4.8% of GDP in FY25, 10 basis points lower than the Budget target of 4.9%. The government's fiscal deficit was 5.6% of GDP in FY24.

 

Sitharaman in the FY22 Budget had announced a medium-term fiscal consolidation road map, under which the fiscal deficit was to be brought below 4.5% of GDP by FY26 from a record high of 9.2% of GDP in FY21.

 

Economists expect the government to lower the fiscal deficit from the Budget projection by 10 bps this year, despite a weaker-than-assumed nominal GDP growth. Nominal GDP growth is estimated at 9.7% in FY25 compared to 10.5% assumed in the FY25 Budget, which reduces the fiscal room available to the government by 10 bps.

 

"The lower pace of capital spending in the current year is likely to help offset any shortfall on the receipts side, leading to fiscal deficit reaching 4.9% of GDP in FY25, despite undershooting the nominal GDP projections," Rahul Bajoria, head of India economic research at BofA Securities India, said in a report.

 

Capital expenditure has remained low this year due to election-related restrictions and formation of the government in the first half of the financial year. In the first eight months of FY25, the government had spent only 46.2% of the INR 11.1 trillion marked for capital expenditure in the last Budget.

 

The government's fiscal deficit in Apr-Nov was INR 8.47 trillion, accounting for 52.5% of the full-year target of INR 16.13 trillion set in the Budget.

 

BUDGET EXPECTATIONS

The finance ministry, in a half-yearly review report in December, has already said that it aims to lower the fiscal deficit to less than 4.5% of GDP in FY26. Most economists, however, expect the government to target a fiscal deficit of 4.5% of GDP and not below that.

 

"This implies a slightly slower pace of fiscal consolidation, which will allow the government to focus on capex (capital expenditure) spending, and targeted social sector expenditure," Morgan Stanley said in a report.

 

Economists said the government should not look to sharply lower the fiscal deficit to below 4.5%, and instead use the fiscal space to increase capital expenditure, provide tax reliefs, and announce other measures which would help revive the slowing economy. India's GDP growth is projected to moderate to a four-year low of 6.4% in FY25, according to National Statistics Office's first advance estimate released earliet this month.

 

The government's tax revenues are expected to remain robust next year with nominal GDP growth likely to be assumed at 10.5% of GDP. The government's overall revenues may also be boosted by the surplus transfer from the Reserve Bank of India, which is expected to transfer an amount similar to last year's INR 2.1 trillion.

 

Sitharaman is also expected to announce a road map for fiscal consolidation beyond FY26. In the full Budget in July, the government had announced that it will begin targeting debt-to-GDP ratio from FY27, instead of fiscal deficit.

 

"Debt path would be determined by combination of primary deficit and interest cost as a share of GDP. The latter is a function of both interest rates and growth in liabilities," ICICI Securities Primary Dealership said in a report. "Since a primary deficit target would be unfamiliar to markets, government may decide to communicate the roadmap in terms of fiscal deficit/GDP targets which are a combination of the primary deficit and interest cost," the report said.

 

Following are the estimates for the fiscal deficit, as a percentage of GDP, this financial year and the next:

 

ORGANISATION	FY25 FISCAL DEFICIT ESTIMATE	FY26 FISCAL DEFICIT ESTIMATE
Bank of Baroda	4.8-4.9%	4.3-4.4%
Barclays	4.7%	4.5%
BofA Securities India	4.9%	4.5%
Capital Economics	4.9%	4.5%
CareEdge Ratings	4.8%	4.5%
Elara Securities	4.8%	4.5%
Emkay Global Financial Services	4.7%	4.5%
Goldman Sachs	4.9%	4.4-4.6%
HDFC Bank	4.7%	4.4%
HSBC	4.8%	4.4%
ICICI Bank	4.8%	4.5%
ICICI Securities Primary Dealership	4.7%	4.4%
ICRA	4.8%	4.5%
IDFC FIRST Bank	4.7%	4.5%
India Ratings and Research	4.8%	4.5%
Kotak Mahindra Bank	4.7%	4.5%
Morgan Stanley	4.8%	4.5%
Motilal Oswal Financial Services	4.8%	4.5%
Nomura	4.8%	4.4%
Nuvama Institutional Equities	4.9%	4.5%
QuantEco Research	4.9%	4.5%
Standard Chartered Bank	4.8%	4.5%
UBS Securities	4.8%	4.4%
YES Bank	4.7%	4.5%

 

End

 

Edited by Tanima Banerjee

 

 

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