Govt likely to scale down fiscal deficit target to 5% or less in Budget: ICRA

The government is likely to lower the fiscal deficit to 4.9-5% of the GDP for this financial year in the upcoming Budget aided by revenue buoyancy.

The government had pegged the fiscal deficit estimate at 5.1% for the current fiscal year when it presented the interim Budget in February.

"The union government is likely to set a fiscal deficit target at 4.9-5%, lower than projected 5.1% of GDP, without compromising the capital expenditure target of ₹11.1 lakh crore," ICRA Chief Economist Aditi Nayar told PTI.

Finance Minister Nirmala Sitharaman is set to present the full Budget on July 23. This will be her seventh Budget in a row. This budget aims to set the foundation for India's journey towards becoming a developed nation (Viksit Bharat) by 2047.

The government achieved a fiscal deficit of 5.6% of the GDP during the previous financial year.

"There is also a high likelihood of reducing the net market borrowings for the current financial year by ₹35,000-₹55,000 crore vis-à-vis the interim Budget estimate of ₹11.8 lakh crore, which would augur well for yields, along with the demand boost for G-secs owing to their inclusion in the J P Morgan Government Bond Index," she said.

The incremental revenue receipts of Rs 1.2 lakh crore can be split to increase the revenue spending and facilitate fiscal consolidation, she said, adding, the government could utilise it for spurring consumption by providing some income tax sops.

She further said that reducing the absolute size of the fiscal deficit will be quite difficult over the next 3-4 years, with the decline in the fiscal deficit-to-GDP ratio largely dependent on the increase in nominal GDP.

If the government continues with capex at 3.4% of GDP over the medium term (in line with the FY2025 Interim Budget), then incremental fiscal consolidation would require a sustained compression in the revenue deficit, she said.

Notably, she said, the government has 'on-budgeted' a large portion of previously off-budget capex; this should be considered while determining the endpoint of the awaited fresh fiscal consolidation roadmap beyond FY'26.

Assuming that capex of about 1% of GDP has been brought on budget, the government could consider further reducing its fiscal deficit target to 4% of GDP over the medium term, from the expected sub-4.5% of GDP in FY'26, she added.