Govt may not amend FRBM Act again, but aims for 5.5-6% deficit in FY24

The central government is unlikely bring any amendments to the Fiscal Responsibility and Budget Management Act for the third year in a row as it expects that the impact of the global slowdown on the Indian economy in 2023 may impact expenditure commitments in financial year 2023-24 (FY24), Business Standard has learnt.

However, the Finance Ministry is likely to stick to its internal fiscal consolidation roadmap and the 2023 Union Budget may target a fiscal deficit of between 5.5-6 percent of nominal GDP in FY24. The roadmap aims for a fiscal deficit target of 4.5 percent of GDP by 2025-26.

The FRBM Act, enacted in 2003, was brought in to enable the central and state governments to make financially sustainable budgets and to prevent them from racking up unsustainable debt burden. It was enacted with a view to provide a legislative framework for reduction of deficit and debt to a sustainable level so as to ensure inter-generational equity in fiscal management and long term macro-economic stability.

“While the government has its internal consolidation roadmap, there could still be deviations. Most developed economies are heading for a recession, there is geopolitical uncertainty due to the war in Europe, and inflationary pressures still persist. All of this could impact revenue collections and expenditure commitments in FY24,” said a senior government official.

Fiscal deficit is the difference between a government’s expenditure and revenues when the former is higher. The last amendment to the FRBM Act set a target of deficit of 3 percent of GDP by 2020-21.

However, in the 2020 Union Budget, the target was relaxed to 3.5 percent as permitted under the Act. The Centre made use of escape clause to deviate from the fiscal consolidation road map. The option allows the government to widen the deficit by 0.5 percentage points in times of exigencies such as a war or calamities of national proportion.

That was the last budget before the Covid-19 pandemic, and all previous budget assumptions were rendered moot. The deficit ballooned to 9.2 percent in 2020-21, and the target for FY23 is 6.4 percent of GDP.

“While India’s economic foundations remain strong, it is vital for the government to retain requisite fiscal flexibility to effectively respond to emerging contingencies till the pandemic-induced uncertainties ease. Hence, amendment to FRBM law is not being proposed and fiscal projections for the year FY 2023- 24 and FY 2024-25 are not being placed,” the Finance Ministry had said in the last medium-term fiscal policy statement, tabled in Parliament along with the 2022 Union Budget.

“In line with the commitment made in the budget for FY 2021-22, 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 FY 2025-26,” it had said.

There are a number of global and domestic economic considerations which budget-makers in North Block are factoring in, and are confident that a target of between 5.5-6 percent can be achieved in FY24.

With the Indian economy still expected to be on a relatively strong footing, officials expect another year of healthy direct tax collections in FY24. However, global headwinds will continue to weigh in. As per the International Monetary Fund in its latest World Economic Outlook, a third of the global economy is expected to slip into recession in the calendar year 2023. This will include many of India’s biggest trading partners in the West.

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

On the expenditure front, budget makers 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.

“We expect the fiscal deficit to be 5.9 percent of GDP in FY224 from 6.4 percent of GDP in FY23. Consolidation will be led by a reduction in subsidy-related expenditure, which will ensure that the government can continue with its focus on capital spending amid expectations of a steady trend in tax revenues as a percentage of GDP,” Morgan Stanley said in a report on Wednesday.

“We build in a gradual fiscal consolidation path as we believe that continued focus on capex spending is beneficial not only from a cyclical perspective but also for the medium-term growth potential of the economy,” it said.