Slower spending may cut India’s fiscal deficit to 4.75% in FY25: Ind-Ra

New Delhi: India’s fiscal deficit is expected to decline to 4.75 per cent of the gross domestic product (GDP) in the current financial year (FY25), 19 basis points lower than the budgetary estimate, due to slower government spending in the first half of the year, India Ratings (Ind-Ra) said on Wednesday.

The high frequency indicators point towards some slowdown in economic activity in the first half of 2024-25, led among other reasons by slower government spending, Ind-Ra said in a note.

In the Union Budget 2024-25, Finance Minister Nirmala Sitharaman had pegged the fiscal deficit target for FY25 at 4.94 per cent and committed to reduce it to 4.5 per cent by 2025-26.

“The central government is expected to improve its fiscal position from FY25 and on track to achieve its FY26 fiscal deficit target of 4.5 per cent of GDP,” said Devendra Kumar Pant, Chief Economist at Ind-Ra.

Pant said the government capital expenditure is likely to be Rs 62,000 crore lower than the budgetary estimate of Rs 11.11 lakh crore. “Even with this slippage, the capex in FY25 is estimated to have grown 10.6 per cent,” he added.

The Centre’s capital expenditure shrank by 15.42 per cent year-on-year during the April-September period of the current financial year, primarily due to general elections held in April and May, which automatically led to large allocations being put on hold.

To achieve the budgeted target of Rs 11.11 lakh crore, the capex needs to increase by 52.04 per cent in the second half of the fiscal on a year-on-year basis. Ind-Ra said it “appears to be a daunting task.”

According to the rating agency, the government may decide to use the fiscal space created by the lower expenditure to either reduce fiscal deficit or take up additional expenditure in certain sectors which require some support.

The revenue deficit too is forecasted to be lower at 1.66 per cent of GDP in FY25, 12 basis points lower than the budgetary estimate of 1.78 per cent.

While fiscal deficit is the difference between the government’s total expenditure and total revenue earned, revenue deficit denotes the shortage of funds faced by the government in maintaining its day-to-day affairs.