Finance ministry likely to target fiscal deficit of 5.5-6% in FY24 Budget

In the upcoming Union Budget, Finance Minister Nirmala Sitharaman is likely to target a fiscal deficit in the range of 5.5-6 per cent of nominal gross domestic product (GDP) in the next fiscal year (FY24), according to people aware of the matter.

This means the government will stick to its fiscal consolidation road map, which envisages a deficit of 4.5 per cent of GDP by FY26.

“We will stick to the medium-term fiscal consolidation road map, which was a commitment made by the finance minister in the 2021 Union Budget,” said a senior official.

In the last medium-term fiscal policy statement, tabled in Parliament along with the FY23 Union Budget, the finance ministry had said: “In line with the commitment made in the Budget for FY22, the government would pursue a broad path of fiscal consolidation to attain a level of fiscal deficit lower than 4.5 per cent of GDP by FY26.”

“The government would continue with its efforts to attain sustained, broad based economic growth, and take such measures as may be necessary to protect the lives/ livelihoods of the people, while adhering to the path of fiscal rectitude,” it had said.

There are a number of global and domestic economic considerations that policymakers in North Block are factoring in. They are confident that a target in the above-mentioned range could be achievable.

With the Indian economy projected to be on relatively stronger footing, officials expect another year of healthy direct tax collections in FY24. The official quoted above said direct taxes could grow by 15-20 per cent next year, much higher than this year’s budgeted growth rate of 13.6 per cent.

However, global headwinds could complicate matters. According to the International Monetary Fund’s latest World Economic Outlook, a third of the global economy is expected to slip into recession in 2023.

This will include many of India’s biggest trading partners in the West. Then there is China, which has continued imposing its extremely strict zero-Covid policy.

“The Indian economy will be impacted by the slowdown in the West. Both our exports and imports will be hit and that in turn may impact excise and goods and services tax (GST) collections. On the GST front, there is also the matter of base effect,” said a second official.

Officials say the slowdown will affect manufacturing and other related sectors, and, hence, policymakers will have to remain vigilant.

In pre-Budget meetings with Sitharaman, industry bodies and economists sought some relaxation on personal income taxes to boost demand, and rationalisation of the capital gains tax. However, major tax changes are unlikely.

On the expenditure front, policymakers are bracing for another year of high spending commitments for flagship welfare and subsidy schemes. However, the expectation is that the ongoing exercise to curb non-priority spending is going to lead to greater savings in the coming year.

These initiatives include better adaptation of Single Nodal Account dashboard, cutting leakages in the procurement and distribution chain with regards to food subsidy, and identifying and eliminating wasteful expenditure in other flagship schemes.

Industry bodies also told Sitharaman in pre-Budget consultations that the private sector might not see a complete revival of capital expenditure because of the global macroeconomic situation. Hence, they urged the Centre to continue increasing capex.

As reported earlier, for the current financial year (FY23), the finance ministry expects net direct and indirect tax collections to exceed Budget targets by as much as Rs 4.5 trillion, a boost that might still enable it to meet the fiscal deficit target for FY23 of 6.4 per cent of GDP.