Government aims to trim budget deficit by 50 basis points, boost capital spending in FY25

Interim Budget 2024: India is strategically planning to reduce its budget deficit by at least 50 basis points in the fiscal year 2024/25, down from the current year's target of 5.9 per cent of gross domestic product (GDP). Simultaneously, the government is looking to escalate capital spending by up to 20 per cent, news agency Reuters reported quoting two government officials.

The success of shrinking the fiscal deficit while increasing capital spending hinges on a surge in revenues and efforts to curtail subsidies, said Devendra Pant, an economist at India Ratings.

While cutting welfare spending and subsidies is an unconventional move for a government heading into a national election in a few months, Prime Minister Narendra Modi is widely anticipated to secure an unprecedented third term.

Finance Minister Nirmala Sitharaman is set to unveil the budget for the fiscal year 2024/25 on February 1.

The proposed plan to reduce the fiscal deficit by a minimum of 50 basis points is currently under discussion, along with other potential scenarios for the upcoming budget year starting in April, as revealed by one of the government sources.

Both officials expressed confidence in meeting the current year's 5.9 per cent fiscal deficit target, scheduled to conclude on March 31.

The government's ambitious goal is to increase capital spending on infrastructure to around Rs 12 lakh crore, compared to the previous year's plan of Rs 10 lakh crore.

India's economic growth in recent years has been largely propelled by the government's commitment to boosting infrastructure spending, making it one of the fastest-growing economies globally, despite challenges such as high inflation impacting consumption in the Asian country.

A significant reduction in the fiscal deficit is anticipated to reassure foreign investors and rating agencies, who have expressed skepticism about India achieving its objective of narrowing the deficit to below 4.5 per cent of GDP in the next two years.

The government is also keenly aware of this target, given the scrutiny from a new set of investors evaluating the country's debt levels following their inclusion in the JPMorgan and Bloomberg emerging market indexes.

(With Reuters inputs.)