New Delhi: A near 15% expected growth in revenue receipts and a more sedate rise in spending helped finance minister Nirmala Sitharaman lower the fiscal deficit estimate for the current financial year to 4.9% of gross domestic product (GDP) from 5.1% projected in the interim budget.
In absolute terms, the fiscal deficit projected for this financial year is ₹16.13 trillion, compared with ₹16.85 trillion in the interim budget, as the finance minister sought to send a strong signal to the market and rating agencies about the government’s commitment to fiscal prudence.
The gap between receipts and spending will partly be financed by market borrowing of ₹11.63 trillion, compared with ₹11.75 trillion projected in the interim budget. In the financial year ended in March, the government had raised ₹11.75 trillion from the market.
Following the announcement of the revised fiscal deficit, government bond yields initially fell but later pared some gains as the reduction in market borrowing was less than anticipated.
Net tax receipts are projected to grow 11% over a year to ₹25.8 trillion, just a tad above nominal GDP growth of 10.5%. The government’s total receipts, excluding borrowings, are estimated at ₹32.07 trillion.
What really helped revenue receipts grow 14.7% to ₹31.29 trillion was the higher-than-expected dividend from the Reserve Bank of India. In May, the bank cut a dividend cheque of ₹2.11 trillion, up 141% compared to FY23. Thus, overall non-tax revenue is projected at ₹5.4 trillion, a 35% growth over a year ago. This is also higher than the ₹3.9 trillion estimated in February’s interim budget.
The RBI dividend was split equally between fiscal consolidation and higher spending, finance secretary T.V. Somanathan said in a briefing.
The government’s total expenditure, however, grew only 8.5% from a year ago to ₹48.21 trillion. The finance minister held firm to her capital expenditure spending of ₹11.11 trillion. Revenue spending growth was slated to be lower at 6.6%.
This was made possible by cuts because subsidies are expected to be maintained at the level projected in the interim budget, which were lower than levels of actual spending in FY24. The fertilizer subsidy saw a 13% reduction in the FY25 budget at ₹1.64 trillion compared with the amount spent in FY24. Food and petroleum subsidies also saw minor reductions from FY24 levels as was projected in the interim budget.
What next? The government plans to reach a fiscal deficit target of 4.5% or less by FY26, thus maintaining its proposed fiscal glide path.
“The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5% next year,” Sitharaman said. “From FY27 onwards, our endeavour will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as a percentage of GDP.”
The benchmark 10-year bond yield dropped to an intraday low of 6.9260%, the lowest since April 2022, before recovering to 6.9687%. This compared with 6.9588% prior to the budget presentation and 6.9633% at Monday’s close.
India’s government bonds have garnered significant attention this financial year due to their inclusion in JPMorgan’s Emerging Market Debt Index, effective July 2024. Foreign portfolio investors are estimated to have purchased Indian bonds worth $8 billion net so far in 2024.
Sachchidanand Shukla, group chief economist at Larsen & Toubro Ltd said, “Subsidy allocation has been retained at the level set in the interim budget in view of the softening trend in global commodity prices, which is a fair assumption. There is still room for some surprises on the upside as far as revenue collections are concerned.”
