The relevance of “very specific and very rigid” targets for budget deficits and public debt is becoming questionable globally, finance secretary TV Somanathan said on Friday, adding that, rather than setting “Utopian goals” and then deviate from it, the government would rather set realistic ones and meet them.
The comments assume significance as India has in recent years walked its talk on fiscal consolidation, with the latest interim Budget too bearing testimony to this approach. Yet, global credit rating agencies remained ambivalent towards India’s fiscal situation, and indicated status quo in the country’s sovereign rating in their post-Budget commentary.
While the capax growth is budgeted to slow in FY25, the secretary said no additional provision for capex would be required in the year. “There is enough for the current economic conditions. I think private capex is picking up,” he said.
On the “lower subsidy provisions” for food and fertilisers for FY25, the official said the food subsidy was revised up for the current fiscal from the budget estimate of Rs 1.97 trillion to Rs 2.12 trillion (RE) as arrears of decentralised procurement were paid to the states. “For the next year, food subsidy (of Rs 2.05 trillion) is based on anticipated (economic costs of PDS grain), and is very realistic,” he said.
On fertiliser subsidy, however, he said, that the provision of Rs 1.64 trillion for FY25 (as against Rs 1.89 trillion in FY24), is based on current market prices, and more funds would be provided in case prices move up.
India has adopted the recommendations of a panel on fiscal responsibility, for capping the Cenntre’s debt to GDP ratio at 40% of the GDP, and that for states, at 20%. Its original FRBM goal is to keep the fiscal deficit below 3%.
Thanks to better revenue performance, the Centre has revised its fiscal deficit target to 5.8% of GDP for FY24 from the budget estimate of 5.9% and pegged it at 5.1% for FY25, a steeper correction than the market expected. On the fiscal deficit target for next year being “ambitious,” Somanathan said it was founded reasonable revenue growth, reasonable increase in non-tax revenue and tight control over avoidable expenditure.
Fitch Ratings said on Friday that the pace at which India is reducing the size of its fiscal deficit isn’t enough to change its credit profile, as the country continues to have high debt metrics compared with peers. “The budget presented yesterday was broadly in line with our expectations, though with a slightly faster pace of deficit reduction, from when we affirmed India’s ‘BBB-’ rating with a Stable Outlook in January,” it said.
On Thursday, Moody’s Investor Services expressed a similar view, saying, “the envisaged fiscal consolidation will not alleviate pressures on (the country’s) debt affordability amidst high current interest rates..”
With any reference to the comments by the agencies, Somanathan noted that after the pandemic, the world is witnessing major changes in the approach towards public debt and on fiscal deficits, cited the examples of the US and Europe. “I think a more dynamic strategy for fiscal targeting is what will be required,” he said. “I think it is more important to adhere to realistic goals which consider all prevailing circumstances.”
On the way forward for debt and fiscal deficit management, the finance secretary said, that’s is matter for the long run. “However, the government is clear and has been very consistent since 2021-22. That our first milestone is to bring the fiscal deficit below 4.5% by 2025 26. What is to be done thereafter is a matter which will become clear as we get near there,” he said.
The current fiscal glide path, as reflected in the latest Budget, indicates that the Centre’s debt-GDP ratio is projected to reduce from a high of 60.8% in the pandemic-hit 2020-21 to 56% in 2024-25 (BE).
Historically, except in 2007-08, fiscal deficit has been over 3% for the Centre in the last 43 years since 1982-83, according to RBI data. Similarly, the Centre’s debt to GDP has never been 40% in the last 43 years while the states were never 20% since 1996-97.