Case for Fiscal Consolidation: Finance Minister Nirmala Sitharaman stood up on Feb 1 2024, to unveil her laser-sharp focus on the fiscal consolidation of the Indian economy.  The fiscal prudence of the government is visible in stunning fiscal deficit numbers budgeted for 2024-2025.  Sitharaman said that the revised fiscal deficit target for FY24 stood at 5.8 per cent, against the 5.9 per cent fiscal deficit seen in the budget of 2023.  The most stunning is the fiscal deficit target for FY25,  which is seen by the government at 5.1 per cent of GDP, which is a steep 70 bps reduction from FY24 to FY25. 

“FY25 fiscal deficit target at Rs 16.9 trillion, 3 per cent lower than FY24 and equivalent to 5.1 per cent of GDP. Centre targets fiscal deficit below 4.5 per cent by FY26,” credit rating agency CareEdge said in their post-budget report said.  

According to economists, the reduction in the target for fiscal 2025 is attributable to lower revenue spending and robust revenue collections amid moderation in capex growth. “The proposed reduction of fiscal deficit, therefore, hinges on reduced revenue expenditure thrust and marginally better tax collections,” a post-budget report by Crisil Market Intelligence said. 

Fiscal consolidation in the post-COVID phase has relied upon improving revenue collection and moderating revenue expenditure (both as per cent of GDP). “This has resulted in a gradual decline in revenue deficit – with FY25 BE of 2.0 per cent being better than the pre-COVID trend. This raises the likelihood of the government achieving the indicated fiscal deficit target of under 4.5 per cent of GDP in FY26,” Yuvika Singhal, Economist, QuantEco said in its post-budget report. 

The case for fiscal consolidation 

According to Crisil, the government debt, which had ballooned during the pandemic, remains high. “It shot up from 76.5 per cent in fiscal 2020 to 90.7 per cent in fiscal 2021 and currently stands at 84.95 per cent, as opposed to the 60 per cent limit under the FRBM Act,” Crisil said in its post-budget report. 

The report highlighted that India has one of the highest levels of debt among similarly rated sovereigns. Indonesia and Mexico, both of which are also rated BBB by S&P Global, have a much lower debt-to-GDP ratio of 39.79 per cent and 45.49 per cent, respectively

Another factor that made the case for fiscal consolidation is greeted scrutiny of fiscal parameters by global financial markets. India’s increased integration with the global financial markets will subject it to sharper fiscal scrutiny and hence fiscal consolidation is desirable. 

“Some of its sovereign bonds will be included in the JP Morgan Government Bond Index-Emerging Markets (GBI-EM) starting June 2024 and likely in the Bloomberg Emerging Market (EM) Local Currency Index later this year,” the post-budget report by Crisil stated.