Budget '25 to meet fiscal targets at 4.5%, say analysts

While two of the three analysts are expecting the fiscal deficit to print in at 4.5 per cent as planned, one of them expects it to be at 4.4 per cent.
A potential shift in the fiscal objectives away from deficits to debt can have several implications.
A potential shift in the fiscal objectives away from deficits to debt can have several implications.
Updated on
3 min read

MUMBAI: Foreign analysts are expecting the forthcoming budget to stick to fiscal consolidation targets of 4.5 per cent even as it would retain the subsidies while improving the capex.

They also expect nominal GDP growth to claw back to the low-double digits mark.

While two of the three analysts are expecting the fiscal deficit to print in at 4.5 per cent as planned, one of them expects it to be at 4.4 per cent.

UBS India chief economist Tanvee Gupta Jain expects the budget to continue with consolidation in the medium term, it may target the same at 4.4%, 10 bps down than projected.

"In FY25, we expect the fiscal deficit to slightly improve to 4.8% (vs the budget estimate of 4.9%), as we forecast slower than budgeted capex (3% of GDP, vs. 3.4% in FY25)."

"This is because nominal GDP growth was revised down to 9.7% from 10.5%. Going into next year, we expect the pace of fiscal consolidation to slowdown and the government to target a fiscal deficit of 4.4% of the GDP," Gupta Jain added.

Her assumption is based on the assessment that the government will assume a higher nominal GDP growth of 10.5% next fiscal vs. 9.8% in FY25.

From FY27, the government is likely to shift to a new medium-term fiscal consolidation path linked to reductions in government debt, which will give flexibility to decide on an appropriate fiscal trajectory based on domestic and global growth dynamics.

“Overall we expect government capital spending to pick up next year which coupled with shallow monetary easing (base case is 75 bps) should help support real GDP growth of 6.3% in FY26," Gupta Jain said.

On the revenue front, she expects gross tax revenue collection to grow at 11.5-12% in FY26 vs 10.7% so far this fiscal, in line with the improvement in nominal GDP growth to 10.5% in FY26.

This implies tax buoyancy of 1.1, which is lower than the average 1.4 during FY22-24, but similar to the pre-pandemic period of FY11-19.

On the other hand, the key focus area of the budget will be higher capex, consumption and employment but within fiscal boundaries.

She expects capex to grow slightly better than nominal GDP at 12-14%.

Rahul Bajoria, India economist at Bank of America Securities in a report titled ‘From Red Light to Green Light,’ said the country is well-placed to hit its fiscal targets.

"The government is on track to hit its medium-term fiscal target of 4.5% of GDP it had set in 2021 for the fiscal deficit, balancing between growth and fiscal prudence," Rahul added.

"We do not expect the next leg of fiscal targets to be unveiled in this budget but expect them to be provided next year once the existing targets are achieved at 4.5%. This is primarily because of the lower pace of capital spending in the current year. It is likely to help offset any shortfall on the receipts side leading to fiscal deficit reaching 4.9% of GDP in FY25, despite undershooting the nominal GDP projections," he added.

He noted that fiscal consolidation in last three years has come through without sacrificing growth objectives.

He also noted that the loss of economic momentum and nominal GDP growth slowing to single digits for an extended period can create a much bigger tradeoff between growth and fiscal consolidation as the focus is likely to shift to debt and not fiscal deficits.

A potential shift in the fiscal objectives away from deficits to debt can have several implications.

"While there will be an implied need for further fiscal consolidation, but expenditure mix and the pace of economic growth would also be the key. We believe the government is considering to adopt a debt-driven fiscal framework, rather than one anchored on fiscal deficits, to approach the next stage of its medium-term fiscal framework," he said.

Standard Chartered Bank India economist Anubhuti Sahay also pegged fiscal deficit to be targeted at 4.5% of GDP in next fiscal and for the current fiscal at 4.8% vs the budget target of 4.9%

"This will have the combined fiscal deficits narrowing to 7.2% from 7.45%," he said.

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