Government's Fiscal Strategy Amidst Election Year Challenges

MUMBAI: The government is poised to surpass its fiscal deficit consolidation target for FY25, primarily due to a reduction in capital expenditure (capex). This development comes as a surprise to many, especially in an election year where slower approvals have been the norm. Pranjul Bhandari, an economist at HSBC, highlights that the fiscal deficit is expected to close at 4.8% of GDP, slightly better than the budgeted 4.9%.

Looking Ahead to FY26

For FY26, the fiscal deficit target is anticipated to be supported by a significant dividend from the Reserve Bank of India (RBI). Achieving a target of 'below 4.5% of GDP' will necessitate cuts in current expenditures, such as subsidies and centrally sponsored schemes. Aastha Gudwani, chief economist at Barclays, forecasts the FY2024-25 fiscal deficit to be below target, with the FY2025-26 target set at 4.5% of GDP.

Economists Weigh In

Sonal Varma of Nomura projects the FY25 deficit at 4.8% of GDP, supported by lower capex, and expects the FY26 target to be pegged at 4.4%. CareEdge Ratings also forecasts a fiscal deficit of 4.8% for FY25, aligning with the medium-term fiscal roadmap. The potential decline in borrowing for FY26, aided by a record RBI dividend estimated between Rs 1.5-2 lakh crore, further underscores the government's fiscal prudence.