India’s Fiscal Deficit Reaches 85.8% of Target

New Delhi: The Indian government’s fiscal deficit for the current financial year has reached 85.8% of its revised annual target by February, a slight decrease from 86.5% during the same period last year. This development, attributed to stringent spending controls, particularly in capital expenditure, raises optimism about the government’s ability to meet its fiscal deficit goal of 4.8% of GDP for 2024-25. Analysts suggest that the deficit could potentially dip below this target, aided by higher-than-expected nominal GDP growth.

Fiscal Deficit Figures and Trends

As of February, the fiscal deficit stood at ₹13.47 lakh crore, reflecting a 10.3% decrease from the previous year. Notably, the deficit for February alone saw a significant reduction of 55.5% year-on-year, amounting to ₹1.77 lakh crore. This decline is largely attributed to the government’s efforts to rein in spending, particularly in capital projects, which contracted by 35.4% in February compared to the same month last year. The total capital expenditure until February reached ₹8.12 lakh crore, but analysts predict it will fall short of the revised target of ₹10.18 lakh crore for 2024-25.

Impact of Capital Expenditure on Growth

The contraction in capital expenditure has contributed to a slowdown in overall growth, which has now hit a six-year low of 0.8% for the fiscal year. This is significantly below the government’s annual target of a 7.3% increase. The decline in capital spending has been linked to uncertainties surrounding upcoming elections, which have affected project execution timelines. Experts emphasize that a substantial increase in capital expenditure is necessary in March to meet the revised estimates for the fiscal year, a goal that some analysts consider ambitious.

Revenue Spending and Tax Revenue Insights

In February, revenue spending also saw a decline, dropping 12.8% year-on-year to ₹2.69 lakh crore. However, for the period from April 2023 to February 2024, revenue spending increased by 4.7%, although this was below the full-year target of 5.8%. The government’s net tax revenue rose by 9% during this period, falling short of the annual target of 9.9%. To meet the revised annual target, a growth of 13% in March is necessary, which analysts believe is achievable given recent trends in tax collection.

Future Projections and Economic Outlook

Looking ahead, ICRA’s chief economist Aditi Nayar has indicated that the fiscal deficit is likely to align closely with the revised estimate of ₹15.7 lakh crore. If the National Statistical Office’s recent upward revision of nominal GDP growth holds, the fiscal deficit could be contained at 4.7% of GDP. Additionally, non-tax revenue has surged by 36.9%, driven by a record dividend from the central bank, exceeding the annual goal of 32.2%. This positive trend in non-tax revenue could provide further support to the government’s fiscal position as it navigates the remainder of the financial year.

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