Government Reduces Fiscal Deficit Target to 4.9%, Plans for Debt-to-GDP Focus

The government has revised the fiscal deficit target to 4.9% for the current financial year, down from the 5.1% estimated in February's interim Budget. Finance Minister Nirmala Sitharaman maintained the fiscal deficit estimate at 4.5% for 2025-26, as announced earlier.

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Revenue and Expenditure Estimates

For the financial year 2024-25, total receipts excluding borrowings are projected at Rs 32.07 lakh crore, with total expenditure estimated at Rs 48.21 lakh crore. Net tax receipts are expected to be Rs 25.83 lakh crore. The fiscal deficit is pegged at 4.9% of GDP, according to Sitharaman's Budget presentation in Lok Sabha.

In absolute terms, the fiscal deficit has decreased to Rs 16.14 lakh crore from the previously estimated Rs 16.85 lakh crore for this financial year. "The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5 per cent next year. The government is committed to staying the course," said Sitharaman.

Debt Management Strategy

Finance Secretary T V Somanathan explained that post-FY26, the focus will shift from the deficit number to the debt-to-GDP ratio in a normal year. He noted that a fixed figure historically enshrined in the FRBM Act does not account for the debt dynamics of a fast-growing economy like India. "The reason for this is a fixed figure which historically was enshrined in the FRBM Act in the past does not take into account debt dynamics of fast-growing economy like India...what is sustainable in fast growing economy is very different from debt in slow growing economy," he said.

Somanathan added that each year's calibration will be based on maintaining a declining debt path as a percentage of GDP. "So each year's calibration will be done based on what will be a percentage which will keep our debt in reducing path. That will come closer to year when it comes into effect," he added.

Market Borrowing Adjustments

To meet the fiscal deficit, the government has reduced its gross market borrowing target by about Rs 12,000 crore. The revised gross market borrowings now stand at Rs 14.01 lakh crore, down from Rs 14.13 lakh crore estimated earlier this year.

For 2024-25, gross and net market borrowings through dated securities are estimated at Rs 14.01 lakh crore and Rs 11.63 lakh crore, respectively, both lower than those in 2023-24. Gross borrowing was Rs 15.43 lakh crore, the highest ever, in 2023-24.

Expert Opinions

Vishal Kampani, Non-Executive Vice Chairman of JM Financial Limited, commented on the government's fiscal strategy: "Fiscal deficit target has been set lower than market expectations at 4.9 per cent of GDP for FY25." He also noted that "fiscal math looks credible and is in line with the interim budget announcements, indicating that the government is utilising the income tax buoyancy in right areas."

The budget highlights the government's commitment to inclusive growth while adhering to prudent fiscal practices. The aim is to maintain a sustainable economic environment by managing both revenue collection and expenditure effectively.

The government's approach aims to ensure that central government debt follows a declining path as a percentage of GDP from 2026-27 onwards. This strategy reflects an understanding of India's unique economic growth dynamics and aims to maintain fiscal stability while supporting development goals.

By focusing on reducing market borrowings and maintaining a credible fiscal path, the government seeks to balance growth with financial prudence. This approach is designed to foster long-term economic stability and sustainable development for India.