Can Indian Government Achieve a 4.5% Fiscal Deficit in FY26? Analyzing the Finmin Report

The Indian government's recent financial report from the Finance Ministry sets ambitious targets for reducing the fiscal deficit to 4.5% by fiscal year 2025-2026 (FY26). As economists, investors, and citizens await the impact of this report, it’s important to examine its goals, the challenges involved, and what this could mean for the economy.

Understanding the Fiscal Deficit

The fiscal deficit shows the gap between the government’s total revenue and total expenditures. It indicates how much money the government needs to borrow. For instance, in FY21, India's fiscal deficit reached a record high of 9.5% of GDP due to increased spending related to pandemic relief efforts.

Reducing the deficit to 4.5% by FY26 is crucial for fiscal health. This would mean looking at how funds are allocated to ensure maximum societal benefits, especially in essential areas such as healthcare and infrastructure.

Current Financial Landscape

India's fiscal management is currently navigating challenges intensified by the global pandemic. For example, the nation’s public debt stood at about 90% of GDP recently, necessitating careful management of social spending and infrastructure projects against mounting debt.

The Budget 2024-25 was presented during a time of global uncertainty due to conflicts in Europe and the Middle East.

India's strong economic fundamentals have protected the country from the challenges facing the global economy.

This stability has allowed India to focus on growth while managing its finances well. As a result, India remains one of the fastest-growing economies in the world. However, there are still risks to this growth.

The total estimated expenditure for the budget is around Rs 48.21 lakh crore, which includes both revenue and capital expenditures.

When considering grants for building capital assets, the effective capital expenditure (Capex) is projected to be Rs 15.02 lakh crore.

The Gross Tax Revenue (GTR) is estimated to be about Rs 38.40 lakh crore, leading to a tax-GDP ratio of 11.8 percent.

The total non-debt receipts for the Centre are estimated at around Rs 32.07 lakh crore, which includes net tax revenue of about Rs 25.83 lakh crore and non-tax revenue of about Rs 5.46 lakh crore.

A vibrant cityscape showcasing economic activity and growth potential.

Key Strategies for Achieving the Target

To meet the 4.5% fiscal deficit target by FY26, the report suggests several strategies:

1. Enhancing Revenue Collection

Strengthening tax collection will play a major role. The government can improve tax governance and reduce evasion by leveraging technology. For example, the introduction of the Goods and Services Tax (GST) in 2017 expanded the tax base significantly by about 14%.

Additionally, the privatization of non-essential public sector units can free up resources. In FY21, disinvestment raised around $2.6 billion. Similar efforts could help fund essential areas and reduce the fiscal deficit.

2. Rationalizing Expenditure

A detailed evaluation of government spending is essential. Focusing on high-impact projects will ensure that resources are efficiently used. For instance, investing in the $20 billion National Infrastructure Pipeline can lead to substantial economic productivity and job creation, enhancing long-term fiscal health.

3. Promoting Public-Private Partnerships

Public-private partnerships (PPPs) are key to improving efficiencies and sharing financial responsibilities. In the education sector, collaborations have already improved infrastructure quality for over 13 million students. Expanding these partnerships can lead to better services in various sectors, such as healthcare and transportation.

Potential Challenges Ahead

While targeting a 4.5% fiscal deficit is commendable, numerous challenges persist:

Economic Uncertainties

The global economy remains uncertain, and trade slowdowns could impact tax collections. For instance, India's merchandise exports fell by 12.2% year-on-year in September 2023. This decrease could further strain fiscal resources this year if not addressed.

Political Will and Consensus

Reaching fiscal goals requires unity in political decision-making. Policy changes can often meet resistance, delaying essential reforms. A lack of agreement can stall budgets, as seen in previous budgetary processes that dragged on for months.

Structural Reforms

While improving revenue and cutting expenditures are important, structural reforms are vital for sustainable growth. Reforms in labor laws, land acquisition policies, and government transparency can smooth the path toward economic stability, although these changes take time to implement.

Expansive green landscape hinting at agricultural productivity and resource management.

Navigating Toward a 4.5% Fiscal Deficit

Achieving a 4.5% fiscal deficit in FY26 is a challenging but significant goal for the Indian government. It involves a multi-layered approach:

• Enhancing revenue collection

• Rationalizing expenditures

• Fostering public-private partnerships

The road ahead is fraught with economic uncertainties and political dynamics, making the pathway to success less straightforward. It is essential for the government to proactively address these issues to reach its targeted fiscal health. As stakeholders observe the developments following this report, the focus remains on balancing ambitious fiscal targets with the quest for sustainable economic growth.

Through innovative governance and collaboration, India has the potential to achieve these goals and pave the way for future economic prosperity.