The Narendra Modi-led NDA government will achieve its fiscal deficit target of 4.9% of GDP for FY25. This optimistic outlook is supported by a low fiscal deficit of 8.4% of the budget estimate (BE) for the first quarter of FY2025, driven by robust direct tax collections and a controlled pace of spending, Kotak’s latest economic report forecasts.
In the first quarter of FY2025, the government’s total receipts amounted to 26% of the BE, marking a 39% increase from the same period last year. This growth was primarily fuelled by a 50% surge in income tax collections, which reached 25% of the BE. Despite a decrease in corporate tax collections—down 26% from the previous year—the overall gross tax revenue was 22% of the BE, 24% higher than in the same quarter last year.
Indirect tax growth was modest, with GST collections increasing by 9.1%, while customs and excise duties saw a decline, according to the report.
Government spending showed a slow start in the first quarter, accounting for 20% of the BE, which was 7.7% lower than the previous year. However, expenditure picked up significantly in June, rising by 73% month-on-month, bolstered by a 99% increase in revenue expenditure.
Capital expenditure, on the other hand, remained sluggish, with June figures 16% lower month-on-month and overall capital spending at just 16% of the BE, down 35% from the previous year. This slow pace of capital expenditure was evident across several sectors, including roads, railways, defence, and loans to states for capex, the report said.
Kotak’s report anticipates that revenue collections will align with budget targets for FY2025.
Corporate tax growth is expected to accelerate from August, continuing a trend observed in FY2024. Strong income tax growth may also surpass expectations, potentially offsetting any shortfalls in divestment or customs duty revenues. With available fiscal buffers, the government is expected to manage its expenditure effectively, ensuring that the fiscal deficit remains within the 4.9% GDP target.
No changes to borrowings are currently anticipated.
