Informist, Thursday, Jul 18, 2024
By Shubham Rana
NEW DELHI – The government is likely to lower its fiscal deficit target for the current financial year that started in April to 5.0% of GDP from 5.1% projected in the Interim Budget, according to an Informist poll of economists and bond market participants.
The actual fiscal deficit in 2023-24 was 5.6% of GDP, 20 basis points lower than the revised Budget estimate of 5.8%. In a General Election year, the incumbent government presents an Interim Budget in Parliament. The government had presented the Interim Budget for 2024-25 on Feb 1. Finance Minister Nirmala Sitharaman will present the full Budget for 2024-25 on Tuesday.
"The saving on the 2023-24 fiscal deficit implies a relatively more favourable base for setting the 2024-25 fiscal deficit target," Nomura said in a report.
Nine of the 21 poll respondents said they expect the government to peg the fiscal deficit for 2024-25 at 5.0% of GDP, while seven respondents see the Centre retaining the target at 5.1% of GDP. Three respondents expect the government to lower the fiscal deficit target to 4.9% of GDP and two have given a range.
The government has enough financial space to cut its fiscal deficit target for the current year thanks to the higher-than-budgeted surplus transfer of 2.11 trln rupees by the Reserve Bank of India. The Interim Budget for 2024-25 had pegged the government's income from surplus of the RBI and dividend of state-owned banks and financial institutions at 1.02 trln rupees.
"Bumper dividend transfer from the RBI along with marginal upside in tax collection is expected to strengthen the Centre's fiscal position," CareEdge Ratings said in a report.
Apart from the RBI surplus, the government's direct tax collections have also been robust so far this year. This, economists said, will provide additional space for the government's finances.
The government's direct tax collection, net of refunds, during Apr 1-Jul 11 was 5.74 trln rupees, up 19.5% from a year ago. Direct tax collections till Jul 11 made up 26% of the full year's budgeted estimate of 21.99 trln rupees. The government will also get a boost from the base effect as the total tax collections in 2023-24 were 276 bln rupees higher than the revised estimate.
The Centre is likely to use the additional funds to increase revenue expenditure, and likely to announce tax sops as well, economists said.
Economists and market participants are of the view that the result of the General Elections, where the Bharatiya Janata Party had to rely on its allies in the National Democratic Alliance to form the government, could force the ruling party to announce some welfare measures.
Informist had reported in June, citing senior financial ministry officials, that the government will try to strike a balance between fiscal prudence and increasing allocations for social welfare schemes.
According to ICICI Bank, the Centre could announce an increase in standard deduction to 100,000 rupees from the current 50,000 rupees. It can also change tax slabs, introduce a new tax slab in between 5% and the 20% bracket, and also give tax relief at the lower end of the income pyramid, economists at ICICI Bank said in a report.
The government can afford to forego revenue from the income tax front, as it is likely to receive another bumper surplus transfer from the RBI next year as well, economists said.
"I feel the RBI dividend has entered a higher plane or a new normal. It may not be 2.1 trln or 2 trln plus every year, but I think broadly 1.5 to 2 trln kind of dividend numbers are possible for one more year, maybe for a couple of more years also," A. Prasanna, head of research at ICICI Securities Primary Dealership, said.
The Centre is on track to meet its aim of lowering the fiscal deficit target to below 4.5% of GDP by 2025-26, economists said.
The government's fiscal deficit had risen 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.
With 4.5% within grasp, policy watchers look for fiscal consolidation path beyond 2025-26. "Beyond FY26 (2025-26), I think we're waiting for the Budget to see where the more medium-term fiscal path goes at this point. And so I think that will sort of be a key document in framing," Fitch Ratings Asia Sovereign Ratings Director Jeremy Zook told Informist in an interview last month.
The following are the estimates for the fiscal deficit this financial year:
ORGANISATION
FISCAL DEFICIT
Bank of Baroda
4.9-5.1%
Barclays
5.1%
BofA Securities
5.1%
CareEdge
5.0%
Deutsche Bank
5.0%
Goldman Sachs
5.1%
HDFC Bank
5.0%
HSBC
4.9%
ICICI Bank
5.1%
ICICI Securities Primary Dealership
5.0%
ICRA
4.9-5.0%
IDFC FIRST Bank
5.0%
India Ratings
4.9%
Kotak Mahindra Bank
5.0%
Motilal Oswal Financial Services
5.0%
Nomura
5.0%
SBI Mutual Fund
5.0%
Societe Generale
5.1%
Standard Chartered
5.1%
State Bank of India
4.9%
UBS Securities
5.1%
End
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