India’s fiscal situation for FY25 presents a mixed picture, with the projected fiscal deficit of 4.8% of GDP coming in slightly lower than the budgeted target of 4.9%. This marginal improvement in the fiscal deficit, as reported by CareEdge Ratings, signals resilience in India’s economic performance, despite certain challenges on the revenue and expenditure fronts.
A Closer Look at the Fiscal Deficit Projection
The fiscal deficit, which reflects the government’s borrowing requirements, is a key indicator of economic health and sustainability. For FY25, CareEdge Ratings estimates the fiscal deficit to be at 4.8% of GDP, a small improvement from the budgeted target of 4.9%. While the difference is modest, it suggests that the government has managed to control its fiscal gap better than initially anticipated, benefiting from a healthy tax revenue performance.
However, it’s important to note that India’s nominal GDP growth is estimated to be slightly lower than expected, with a revised growth forecast of 9.9% for FY25, compared to the budgeted 10.5%. This downward revision in nominal GDP growth impacts the overall tax base and GDP size, which has a direct bearing on the fiscal deficit calculations.
Tax Revenue Performance: Mixed Yet Positive
A closer look at India’s revenue generation reveals a robust performance in certain areas, particularly Goods and Services Tax (GST) and income tax collections. These two tax heads have performed strongly, helping to buffer the government’s overall tax revenue despite weaker-than-expected collections in other areas such as corporate tax and union excise duties.
GST, the indirect tax on goods and services, continues to be a significant contributor to India’s tax revenue, reflecting the ongoing formalization of the economy and increased compliance. Similarly, income tax collections have seen strong growth, particularly as the government’s efforts to expand the tax base and improve compliance continue to yield positive results.
However, the shortfall in corporate tax and union excise duties remains a concern. Both of these taxes are more volatile, often subject to economic fluctuations and sector-specific downturns. The weaker performance in these areas has put a dent in the government’s overall revenue collections, although the positive performance in GST and income tax has helped offset these losses to some extent.
Expenditure Woes: Capital Expenditure Shortfall and Rising Revenue Costs
Despite the strong tax revenue performance, India’s expenditure pattern raises some concerns. The Centre’s capital expenditure (capex), which is critical for long-term infrastructure development, is expected to fall short of its target by a significant Rs 1.5 trillion. This shortfall could have implications for the government’s long-term infrastructure goals, potentially delaying projects that are crucial for India’s economic growth and modernization.
In addition to the capital expenditure shortfall, the Centre’s revenue expenditure is likely to exceed budget estimates. This is largely due to additional allocations under the first supplementary grant, which are often made to meet urgent funding requirements in areas like welfare schemes, subsidies, and other government expenditures. Higher revenue expenditure can strain the fiscal balance, as it implies a greater need for borrowing or a reduction in surplus funds.
A Balanced Outlook for FY25
In conclusion, India’s fiscal outlook for FY25 is characterized by a mix of positive and challenging trends. The slight reduction in the fiscal deficit, from the budgeted 4.9% to 4.8%, indicates a certain level of fiscal discipline, underpinned by healthy tax collections, especially in GST and income tax. However, the shortfalls in corporate tax and excise duties, along with the underachievement in capital expenditure, suggest that India’s fiscal challenges are far from over.
The government will need to carefully manage its expenditure, especially capital expenditure, to ensure that it doesn’t compromise long-term growth prospects. At the same time, strengthening tax collections, especially in the corporate sector and excise duties, will be essential to offset any future shortfalls.
India’s ability to navigate these challenges while maintaining fiscal discipline will be key to achieving sustainable economic growth and long-term fiscal stability
