Finance Minister Nirmala Sitharaman, while announcing the interim budget, set the fiscal deficit target of 5.1 per cent for 2024-25 and below 4.5 per cent by 2025-26.

The lower-than-anticipated fiscal deficit for 2023-24 along with the Reserve Bank of India’s (RBI) Rs 2.11 lakh crore dividend to the Centre will provide enough headroom to the new government to expand capital expenditure while sticking to a stricter fiscal deficit target. The RBI transferred Rs 87, 416 crore to the government.  

The new government, which is expected to present the full Budget in July could either set a lower fiscal deficit target for the current financial year or use the money to fund infrastructure and even tackle other “spending surprises.”

Robust revenue collection driven by higher-than-expected tax receipts and lower subsidy outflow are the key factors that have helped bring down the fiscal deficit.  

Earlier this week, Standard & Poor’s (S&P) raised India’s sovereign rating outlook from ‘stable’ to ‘positive’. Ratings agency Fitch noted that transfers from RBI to the government can be significant at the margin for fiscal performance, but depend on various factors, including the size and performance of assets held on the central bank’s balance sheet and India’s exchange rate.

A lower-than-projected fiscal deficit will also help India in improving its sovereign rating. Fiscal deficit, one of the most crucial economic indicators, also has a bearing on growth and production costs. It could also have an impact on inflation.

State Bank of India group’s chief economist Soumya Kanti Ghosh said that the RBI’s dividend could be high even for the current fiscal year. “With improved economic activities, managing the fiscal deficit will not be a very tough task for the government. It will be able to stick to the projections despite the economic uncertainties globally,” Ghosh told The Secretariat.

The government plans to bring down the fiscal deficit to 4.5 per cent of GDP by FY26.

According to EY, the fiscal deficit during the first three quarters of 2023-24 as a proportion of GDP stood at 4.5 per cent as compared to 5.0 per cent.

Fiscal Deficit Status Globally

Global fiscal deficit in 2023, meanwhile, surged to 5.5 per cent of GDP, rising by 1.6 per cent points over 2022. According to EY, with expenditures remaining virtually unchanged in 2023 compared with 2022, a fall in revenues was the main driver of the uptick in fiscal deficits of major economies as windfall revenues from inflation waned.