The government has delivered a “balanced Budget” with a focus on capital spending to stir economic activities but there are upside risks to meeting the fiscal deficit target of 4.5% of GDP by FY26 as a global slowdown will weigh on India’s growth as well, according to analysts.
Nevertheless, the commitment to stick to the target is reassuring, they said. The Centre has budgeted to trim its fiscal deficit to 5.9% of nominal GDP from 6.4% (revised estimate) for FY23.
Jeremy Zook, director and primary sovereign analyst for India at Fitch Ratings, said, “We still believe it will likely be challenging for the government to achieve its 4.5% of GDP deficit target by FY26, as achieving this target implies an additional 0.7% of GDP consolidation in each of the subsequent two fiscal years.”
Given the still uncertain outlook for the global economy and commodity prices, there is potential risk to the deficit target before the next general elections, “in particular in the event that a shock such as another commodity price spike leads to pressures for sustained subsidy spending,” Zook said. “Nevertheless, the commitment to reducing the fiscal deficit is a positive signal for debt sustainability,” he added.
Christian de Guzman, senior vice president at Moody’s, too, saw some risks in realising the target. “The current pattern suggests that perhaps there could be some upward pressure on expenditure, especially if they (government) continue with this focus on capex,” Guzman told Reuters.
A top finance ministry official, however, exuded confidence that the medium-term deficit target would be met. “The Centre brought down its fiscal deficit from as much as 9.2% of GDP in FY21 to 6.4% in FY23, despite challenges like the Covid outbreak, the Ukraine war and the global slowdown now. This shows the seriousness of the government’s commitment to fiscal consolidation. So, the 4.5% target for FY26 is quite realistic,” he added. India’s nominal GDP growth is budgeted to slow down to 10.5% in FY24, against an estimated 15.4% in FY23.