Modi govt may stick to fiscal ‘glide path’ despite elections

New Delhi: Despite the pressure of increasing allocations on the social welfare schemes to appease voters ahead of the upcoming Lok Sabha elections, Prime Minister Narendra Modi government is likely to stay on the fiscal consolidation path in the interim budget to be presented on February 1.

According to analysts, the government is likely to lower the fiscal deficit target by around 50 to 60 basis points for the year starting April 2024 as against the projected 5.9% for the current financial year.

Rating agency ICRA expects the fiscal deficit target for 2024-25 to be set at 5.3% of GDP, midway through the expected print of 6% for 2023-24 and the medium-term target of sub-4.5% by FY2026.

India’s fiscal deficit or the gap between the government’s income and spending soared to a peak of 9.2% of GDP in 2020-21 due to COVID-19 related disruptions. It eased to 6.8% of GDP in 2021-22 and declined further to 6.5% of GDP in 2022-23. For the current financial year the government has set a target to bring it further down to 5.9% of GDP.

Sources said, the Budget session of parliament is likely to run from January 31 to February 9. President Draupadi Murmu is likely to address a joint session of the two houses of Parliament on January 31 followed by presentation of the interim budget by Union Finance Minister Nirmala Sitharaman on February 1.

With the upcoming Union Budget for 2024-25 set to be an interim one for the purpose of a vote-on-account, major policy changes and announcements are unlikely. However, the expansion in the Government of India’s capex (capital expenditure) and the extent of fiscal consolidation would be scrutinised closely, ICRA said in a note.

A committee chaired by N K Singh to review the Fiscal Responsibility and Budget Management (FRBM) Act recommended a “glide path” for FY 2017-18 to 2022-23 to bring down the fiscal deficit to 2.5% of GDP. However, COVID-19 led to contraction in the economy and thus hit the government’s fiscal consolidation path.

In the 2023-24 Union Budget, Finance Minister Sitharaman reiterated the government’s commitment to pursue a broad path of fiscal consolidation and bring down the fiscal deficit to 4.5% of GDP by 2025-26.  

“India’s growth outlook remains robust despite a highly uncertain global macroeconomic environment. The interim budget will be focused on sustaining the growth momentum without compromising on the glide towards a 4.5% fiscal deficit to GDP by FY 2026 from the budgeted 5.9% in this fiscal,” said Mohit Ralhan, Chief Executive Officer, TIW Capital.

Like the 2023-24 budget, Sitharaman is likely to continue the focus on capital expenditure to boost economic growth. Last year, the finance minister proposed to increase capital expenditure by 33% to Rs 10 lakh crore. According to ICRA, the government is expected to peg capital expenditure for 2024-25 at Rs 10.2 lakh crore.

“A higher capex target would impinge on the Government of India’s ability to bridge half the required fiscal consolidation in FY2025, thereby making the task of reaching medium-term fiscal deficit target by FY2026 even more challenging,” ICRA said.