Improved fiscal resilience amid modest tax buoyancy

Finance Minister Nirmala Sitharaman has presented fiscal consolidation projections that surpass expectations for the current financial year and Budget Estimates (BE) for the next year, despite the conservative tax buoyancy in the estimates.

While many analysts previously believed that the fiscal deficit, the excess of government expenditure over its revenues, projected in BE for 2023-24 (FY24) could be met in absolute figures, meeting it as a proportion of gross domestic product (GDP) would be difficult due to lowerthan-projected nominal economic growth.

The Interim Budget had assumed nominal GDP growth of 10.5 per cent of GDP, but First Advance Estimates placed it at 8.9 per cent. However, not only is the fiscal deficit lower in absolute terms — ~17.35 trillion in Revised Estimates (RE) for FY24 against ~17.87 trillion in BE — its proportion to GDP was projected to come down to 5.8 per cent in RE against 5.9 per cent pegged in BE.

This was despite tax revenues, after devolution to states, projected to decrease by 0.28 per cent to ~23.23 trillion in RE for FY24. Part of the reason for this was a transfer to states amounting to ~7,000 crore for past dues. However, non-tax revenue, particularly transfers from the Reserve Bank of India, compensated for the revenue loss on the tax front. These rose by 24.5 per cent to ~3.76 trillion in RE for the current financial year.

Along with subdued proceedings from disinvestment, this provided only 1.45 per cent higher revenue to the Centre at ~27.55 trillion. The finance minister improved fiscal consolidation in the revised projections for the current financial year by reducing capital expenditure (capex) by over 5 per cent to ~9.5 trillion in RE compared to BE. If grants for capital assets are included, the total capex was down over 7 per cent at ~12.71 trillion.

For the next year, expectations were that the government would set the Centre’s fiscal deficit at 5.2-5.3 per cent, but Sitharaman projected it at 5.1 per cent. She also expressed commitment to the fiscal consolidation path, aiming to bring the deficit below 4.5 per cent during 2025-26.

This was sought to be achieved by keeping close tabs on revenue expenditure but accelerating capex amid moderate tax buoyancy. Revenue expenditure is projected to be higher by just around 3 per cent at over ~36 trillion for 2024-25 (FY25) compared to RE for FY24.

The finance minister defied expectations of enhanced allocation for some schemes such as Pradhan Mantri Kisan Samman Nidhi and rationalised subsidies on petroleum, fertiliser, and food, although it raised the allocation under another flagship scheme, the Mahatma Gandhi National Rural Employment Guarantee Act, and production-linked incentive schemes.

This would help the government contain the revenue deficit (the gap between income and expenditure of the government for meeting current needs) at 2 per cent of GDP in FY25 against 2.8 per cent in RE.

Capex was set higher by almost 17 per cent for FY25 at ~11.11 trillion over RE figures. Including grants for capital assets, this figure was up 18 per cent at almost ~15 trillion.

“The higher-than-expected capex and lower-than-projected fiscal deficit suggest that the quality of expenditure is going to be healthier than what we had pencilled in both in FY24 and FY25,” ICRA chief economist Aditi Nayar said.

Vivek Iyer, partner at Grant Thornton Bharat, said fiscal consolidation is a big credit positive for India from a sovereign rating standpoint.