Economy
'India On Track To Achieve Fiscal Deficit Target' As Tax Revenues Surpass Expectations Amid Continued Infrastructure Push
India Ratings and Research (Ind-Ra) expects the union government’s fiscal deficit in FY25 to be 19bp lower than FY25 (BE).
India Ratings and Research (Ind-Ra) latest research report forecasts the union government’s fiscal deficit for Financial Year FY25 to be 4.75 per cent of GDP which is 19 basis points lower than the Budget Estimate (BE) of 4.94 per cent.
The report emphasises that despite economic headwinds in the first half of FY25, the government remains on track to achieve its FY26 fiscal deficit target of 4.5 per cent.
Devendra Kumar Pant, Chief Economist and Head of Public Finance at Ind-Ra, stated, “The union government is expected to improve its fiscal position from FY25 and is on track to achieve its FY26 fiscal deficit target of 4.5 per cent of GDP.”
Let's look at what the research report estimates on other key parameters.
1. Tax Revenues Surpassing Expectations
Ind-Ra predicts FY25 gross tax revenue at 12.02 per cent of GDP and net tax revenue at 8.08 per cent of GDP, both marking a 17-year high. Gross tax revenue is projected to be 28 basis points higher than the BE, while net tax revenue is estimated to be 16 basis points above the BE.
This optimism surrounds income and corporate tax collections, though customs duty and union excise duty may fall short by Rs 143.52 billion and Rs 163.67 billion, respectively.
As far as GST collections are concerned, it is expected to be broadly the same as FY25 (BE).
2. Drag on Non-Tax Revenues and Disinvestments
On non-tax revenues and disinvestments, Ind-Ra projects a shortfall against the budgeted Rs 5.46 trillion and Rs 0.78 trillion, respectively. This underperformance poses challenges for revenue generation outside the tax domain.
3. Revenue Expenditure Trends
The trends reveal significant disparities in spending by various ministries. While the Civil Aviation, Railways, and Road Transport & Highways ministries have spent over 100 per cent of their FY25 allocations in the first half of the fiscal year, 43 other ministries have utilised less than 40 per cent of their allocations during the same period.
4. Capital Expenditure at Two-Decade High Despite Slippages
Capital expenditure (capex) for FY25, though projected to fall short of the budgeted Rs 11,111.11 billion, is expected to reach Rs 10,489.65 billion, accounting for 3.21 per cent of GDP — the highest in two decades.
However, capex in the first half of FY25 contracted by 15.42 per cent year-on-year due to delays stemming from the general elections in May 2024.
To meet the FY25 BE target, capex in the second half would need to grow by a formidable 52.04 per cent year-on-year, which appears challenging, the report noted.
The Ind-Ra report underscores the government’s commitment to fiscal discipline while highlighting areas of underperformance in non-tax revenues, subsidies, and capex.
The Ind-Ra report notes that the fiscal space created by reduced expenditure could be leveraged either to further narrow the fiscal deficit or to support sectors requiring additional funding.
With economic recovery hinging on robust expenditure in the latter half of FY25, achieving fiscal targets remains a formidable task but aligns with the government’s medium-term objectives.
