MUMBAI: Even though political imperatives vastly dominated the first budget of the Modi government in its third term, Finance Minister Nirmala Sitharaman has walked the talk on her commitment to fiscal prudence mostly due to the whopping Rs 2.11-trillion windfall received from the Reserve Bank and has lowered the fiscal deficit target more than anticipated to 4.9 percent for this year and to 4.5 percent in the next. She has walked the fiscal correction path despite expanding the Budget size by a full 1.2 percentage point over the interim budget and 7 percentage points from FY24.
Many expect the more than expected fiscal consolidation this year and the next will lead to a sovereign rating upgrade next fiscal from BBB-( lowest rating for a security to be considered investment grade) with stable outlook to a BBB, which is the indication that expectation of default risks are currently low.
The interim Budget had set a fiscal deficit target at 5.1 percent but at that time the North Bloc had no hint that the RBI would be surprising everyone with a massive surplus of Rs 2.11 trillion for fiscal 2024. Two other enablers are the spike in tax revenue and higher dividend payouts providing more fiscal space.
Accordingly, the Budget has struck a fine balance by capping the fiscal deficit, gross borrowing is pegged at Rs 14.01 trillion and net borrowing penciled at Rs 11.63 trillion for the year, despite vastly expanding the welfare schemes primarily aimed at the farmers, women, and the unemployed youth as the key state of Maharashtra, where the BJP is facing headwind is going to polls in October along with three other states.
Fiscal deficit that was trending down from FY16 and was at 4.6 percent in FY20 but shot up to 9.2 percent in FY21 as the economy was whacked by the pandemic, which saw growth tanking by a full 23.8 percent in the first quarter of FY21. Deficit came down to 6.8 percent in FY22 and further down to 6.4 percent in FY23 and 5.6 percent (provisional) in FY24.
On the revenue side, the Budget has pegged an 11 percent rise in tax revenue at Rs 25.84 trillion, up from Rs 23.27 trillion in FY24 (10.9 percent growth) and Rs 20.98 trillion or 16.2 percent growth over the previous fiscal. It also expects Rs 1.5 trillion in dividends and profits this fiscal, marginally down from Rs 1.54 trillion in FY24. At this the share of non-tax revenue to tax revenue will rise to 4 percent from 3.76 percent of the total. The budget has also pegged a lower Rs 50,000 crore from asset sales, up from Rs 30,000 crore in FY24.
The Budget sees the primary deficit coming down to 1.4 percent from 2 percent and revenue deficit at 1.8 percent from 2.6 percent. The populist schemes will eat up Rs 4.28 trillion of the Budget or 1.3 percent of GDP, down from Rs 4.4 trillion or 1.5 percent in FY24. In the pandemic year of FY21, the subsidy bill was Rs 7.8 trillion or 3.8 percent of GDP. It expects nominal GDP grow 10.5 percent up from 9.6 percent in FY24 and real growth around 7 percent, down from 8.2 percent notched up in FY24.
Despite many populist measures, the Budget maintains the capex push in absolute terms allocating Rs 11.1 trillion, up 16.9 percent over FY24 when it was Rs 9.5 trillion or a 28.4 percent growth over the previous fiscal. The size of the Budget has increased by 7.3 percentage points to Rs 48.2 trillion in FY25, which in FY24 was Rs 44.9 trillion, or 7.1 percent over the previous fiscal. In FY20, this was Rs 26.9 trillion.
In another sign of the strengthening fiscal position, the Budget seeks to lower the debt to GDP ratio this fiscal from 58.1 to 56.8. These ratios stood at a high of 61.5 in FY21, up from 52.3 in FY20.