Will the Budget restrict central fiscal deficit to 5.8% of GDP?

Ahead of the Union Budget on 01st Feb, the big question is on the fiscal deficit. There is a segment that wants a drastic overhaul of the fiscal deficit estimates for FY24. Is that likely to really happen?

Targeting fiscal deficit

In the last year, the fiscal deficit is down from 6.9% of GDP to 6.4% of GDP. The lower figure was an outcome of better spending controls and also higher GDP. The big question is what would be fiscal deficit target for FY24. In fact, numbers being touted range from 5.8% on the lower side to 6% on the upper side. That would be a lowering of the fiscal deficit targeting by 40 bps to 60 bps. It would not just be the fiscal deficit figure but the glide path that will really matter.

Glide path; and why to do it?

A glide path for fiscal deficit is guidance over next 3-4 years. When the FRBM Act was passed earlier, the idea was to take fiscal deficit gradually lower to the level of 3.5% and stabilize at 3.0% of GDP. While the Indian economy was on the glide path, the COVID pandemic was a kind of dampener to the reduction of fiscal deficit. Due to the massive outlays planned to revive growth, the deficit was 9.2% in FY21, 6.9% in FY22 and 6.4% in FY23. The glide path would show the commitment of government to progressively reduce the fiscal deficit and will also send a signal to investors and to the sovereign rating agencies.

How to set the glide path?

Ideally, the glide path should not be more than 3 years; that means at the most it can go up to FY26. The center must plan to aggressively trim the fiscal deficit to a level of around 4.5% by FY26, which means taking fiscal deficit to 5.8% in FY24 and cutting another 130 basis points in 2 years. The real challenge is that, this has to be done without impacting the capex, which is the core of future growth. An aggressive glide path would convince the rating agencies and FPIs that the government is serious about fiscal prudence. This will be value accretive for India from a global sovereign rating perspective too. 

It is risk worth taking

The million dollar question is, whether India can really achieve such a glide path to lower fiscal deficit. The answer is that it is a risk worth taking. It would convince the investors and the rating agencies that the government is dead serious about fiscal prudence. It is also essential to demonstrate commitment, but the first step is to make that kind of commitment. We have seen in the past that the sovereign rating agencies and the FPIs have been extremely positive about an aggressive glide path to cut the fiscal deficit. The last 3 years were challenging years, and now India shows signs of recovering faster. That must be backed by fiscal prudence. The quicker India does it, the better it would be!