Budget 2024: Centre likely to cut fiscal deficit target in FY25

The GoI’s capex expansion and the extent of fiscal consolidation in this year’s Interim Budget 2024 will be keenly watched as the Centre aims to lower fiscal deficit in the year 2024-25. The government is hopeful of achieving the fiscal deficit target of 5.9% of gross domestic product (GDP) in 2023-24 as it’s unlikely to overshoot the FY2024 BE target of ₹17.9 lakh crore.

To put the Centre’s fiscal deficit in perspective, the fiscal deficit was 6.4% of the GDP in FY23 (RE) and the target for FY24 (BE) was 5.9%.

The Centre had earlier set a medium-term target of restricting the fiscal deficit to below 4.5% of GDP in FY2026. Experts say the government will have to budget for a deficit of around 5.3% for FY25, midway through the expected print of over 6% in FY2024 and the medium-term target. "It'll be prudent to attempt to bridge half the required consolidation in FY25, and budget for a deficit of around 5.3% of GDP," says ratings agency ICRA.

In its FY25 target, experts have called for striking a balance between fiscal consolidation and incremental capex. With the assumption of a sharper expansion in revenue receipts (+9.5%), compared to revenue expenditure (3.9%), the revenue deficit is expected to entail a substantial correction to ₹7.9 lakh crore, 2.5% of the GDP estimate, in FY25 from ₹9 lakh crore for FY24, ICRA thinks. "This would entail an absolute fiscal deficit figure of ₹17.1 trillion in FY25, a welcome decline from ₹17.9 trillion budgeted by the GoI and expected by us for FY24".

Analysts at brokerage Sharekhan also think the government may cut down the fiscal deficit as compared to the previous year’s target of 5.9% of GDP as the fiscal deficit is expected to be lower for FY24E. "We expect fiscal deficit estimates for FY25E to be in the range of 5.4-5.5% of GDP subject to increase in revenue and control over subsidy provisions.”

Based on the provisional data for 8 months of the current fiscal year (Apr-Nov’23), the gross taxes are seen exceeding budget estimates by ₹1.3 lakh crore in FY24 for the third consecutive year.

In the first supplementary demands presented on December 6, 2023, the Centre has sought to authorise an additional cash outgo of ₹58,400 crore in FY24, largely because of higher subsidies and defence services. “Total spending will exceed FY24BE by INR700-800b, led by higher NREGA spending. If so, the fiscal deficit will be INR17.6t in FY24, lower than the target of INR17.9t, but at 5.9% of GDP, as per the BEs,” write Motilal Oswal’s Nikhil Gupta and Tanisha Ladha in their budget preview note.

Assuming the Centre meets its capital spending target of ₹10 lakh crore in FY24, it will have to grow 44% YoY during the December 2023-March 2024 period, following a decline of 9.4% YoY in the corresponding period last year. “Overall, higher receipts of about ₹1 lakh crore will help the Centre meet its additional spending of ₹70-80,000 crore and its fiscal deficit target of 5.9% of GDP,” the note says.