The full Union Budget for fiscal year 2024-25 (FY25) is likely to focus more on fiscal consolidation than populist schemes. Government officials said that this is critical in achieving a sovereign rating upgrade from at least S&P Global after a gap of 17 years.
The interim budget projected fiscal deficit for FY25 at 5.1 per cent. It also reiterated, as announced in the Budget Speech for FY 2021-22, that the Government would continue on the broad glide path of fiscal consolidation to reach a fiscal deficit and to a GDP level below 4.5 per cent by FY2025-26.
“Tax collection along with record surplus from RBI has boosted revenue growth to provide an opportunity to expand the budget. Still, effort could be more on optimal allocation of resources and sticking to fiscal consolidation,” an official told businessline. Another official said, “Strong focus on fiscal consolidation might bring one more good news and that is sovereign rating upgrade.”
In May, S&P Global retained that rating at ‘BBB-‘ but revised the outlook to positive. It said that the positive outlook reflects its view that continued policy stability, deepening economic reforms and high infrastructure investment will sustain long-term growth prospects.
“That, along with cautious fiscal and monetary policy that diminishes the government’s elevated debt and interest burden while bolstering economic resilience, could lead to a higher rating over the next 24 months,” it said. The rating was last upgraded on June 2007 from ‘BB+’, while outlook was revised to stable on September 26, 2014.
Meanwhile, various research agencies expect fiscal deficit estimate to moderate. In a note, CARE listed that bumper dividend transfer from the RBI along with a marginal upside in tax collection will strengthen the centre’s fiscal position. “We expect a total upside of ₹1.4 trillion in overall revenue collection when compared to estimates of the interim budget (₹1.25 trillion in non-tax revenue plus ₹150 billion from tax revenue),” it said.
However, the government would look to channel part of this fiscal space from higher revenue collection to increase revenue expenditure. Considering the above factors, it felt that there is sufficient space to reduce the fiscal deficit target for FY25 to five per from 5.1 per cent projected in the interim budget. “With sovereign rating agencies watching the debt trajectory, the focus on fiscal consolidation should continue,” it said.
In a report, Morgan Stanely expected the fiscal deficit for FY2025 will narrow to 5.1 per cent of GDP, in line with the government’s interim budget estimates. “We ascribe the fiscal consolidation to the continued buoyancy in receipts, especially direct tax collections, whilst the record-high RBI surplus dividend provides additional fiscal space, to retain emphasis on higher capital spending, better targeting of welfare measures, and continued fiscal consolidation to align with the medium-term target of 4.5 per cent of GDP by F2026,” it said.