Editorial. The fisc matters

Amid the heat and dust of the Lok Sabha elections, the latest CGA (Controller General of Accounts) release on Central government finances has flown under the radar. It shows that the Centre’s actual fiscal deficit for FY24 at 5.6 per cent of GDP, was lower than the revised estimate of 5.8 per cent in the February budget. It is lower not only in percentage terms (which can happen due to GDP overshooting estimates) but also in absolute terms, with the deficit at 95.3 per cent of revised estimates (RE). The Centre has also reined in its revenue and primary deficits at 91 per cent and 86.8 per cent of RE. This is a very creditable achievement.

Historically, central government deficits overshoot revised estimates by wide margins. Current deficit numbers are more credible -- being free of off-balance sheet items. The good fiscal show in FY24, along with the bountiful dividend from Reserve Bank of India now suggests that the Centre has more than a fighting chance of attaining its fiscal consolidation targets of 5.1 per cent by FY25 and 4.5 per cent by FY26. Buoyant tax collections, which met revised estimates, helped attain deficit targets in FY24. The Centre’s gross tax revenues grew by 13.4 per cent, with growth in personal income tax collections (25 per cent increase) outpacing corporate tax mop-ups (10.4 per cent). Hefty dividends from PSUs helped non-tax revenues significantly overshoot revised estimates.

Expenditure control has also played a role in deficit reduction; the NDA government’s efforts to trim revenue expenditure are under-appreciated. The last five years have seen significant economies on the Centre’s wage bill, with its budgeted spending on salaries and pensions cut to 8.3 per cent of total expenses for FY25 from 14.6 per cent in FY20. The removal of distinctions between plan and non-plan expenditure and the rationalisation of Central schemes have led to more effective funds use and monitoring. The use of a single nodal agency to transfer funds to implementing agencies on Centrally-sponsored schemes and just-in-time release of funds to States after verifying end-use, have also reduced idling of money and earned higher interest receipts. While revenue spending has been trimmed, the expenditure mix has been vastly improved by allocating nearly a fifth of the budget to capital spending.

The crucial point though is that the new government should stick to the fiscal consolidation path. A Lok Sabha mandate suggesting that voters expect more welfare spending and the prospect of NDA’s coalition partners pushing for a populist agenda, may make the task harder. Recent macro tailwinds – whether it is Indian bond yields decoupling from the US, government securities earning a place in global indices or S&P’s outlook upgrade -- are a result of NDA’s adherence to fiscal targets. Foreign bond investors can quickly retreat on fiscal slippages. Hopefully, the unexpected fiscal boost from the RBI dividend will help the Centre squeeze additional welfare spending into the budget without sacrificing the 5.1 per cent deficit target.