Staying put on the fiscal deficit glide path will require the Union government to moderate its capex momentum seen in recent years, Crisil has said in a report. Even if the capex momentum is reduced, the share of capex in gross domestic product (GDP) would remain higher than the pre-pandemic level in the medium term, it observed, giving three different possible scenarios.
A mix of revenue-enhancing measures (disinvestment and asset monetisation) and further rationalisation of revenue expenditure might be needed to reduce the capex sacrifice.
The Budget 2023-24 which set a fiscal deficit target of 5.9% of GDP for the next fiscal signalled a return to the glide path, after the pandemic bloated the deficit from 4.6% in FY20 to 9.2% in FY21. The deficit was is being reined in at 6.4% this fiscal, as some spends during the pandemic were moderated and economic recovery, along with inflation, lifted revenue collections.
Commenting on the goal of reducing the deficit to below 4.5% by FY26, Crisil said less favourable debt dynamics in the coming fiscal vis-à-vis the past two years make the pursuit of fiscal prudence even more imperative, with just two more years to go to strike 4.5%.
“The 5.9% target set for the coming fiscal appears doable. The underlying assumptions of growth and revenue buoyancy are fairly realistic. The risk to budget math is from a gloomier-than-expected global environment hurting domestic growth via exports and messy geopolitics keeping crude and commodity prices high.
The goal of cutting fiscal deficit by 70 basis points in FY25 and FY26 each, could be challenging, Crisil said, adding that it will require continuous fiscal vigil.
The extent of government capex thrust seen in the past 2-3 years is unlikely to sustain beyond fiscal 2024, if trimming the fiscal deficit is indeed a priority. “In other words, our scenario analysis suggests that the government will have to moderate capex growth to meet the deficit target,” the agency said, demonstrating this assumption using three different scenarios.
