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Fiscal Deficit

Interest Payment Burden to reduce in FY26

Interest Payment Burden to reduce in FY26

Interest Payment Burden to reduce in FY26

Overview
The fact that the central government’s market borrowings result in unproductive interest payments accounting for a significant portion of its revenue has long been a source of criticism. In addition to high interest rates, previous fiscal mismanagement has plagued the exchequer and kept the central government’s interest outflow high.

Interest Payment over the years
In the last ten years, interest payments have made up 25% of all expenses. From 23% in FY20 to 24% in FY25, this load grew gradually. In FY25, interest payments are projected to account for 31% of revenue expenditures, a significant increase from FY20’s 27%.

Despite a dramatic decline in borrowing costs due to the steep decline in bond yields, the interest burden increased during the pandemic years. The primary cause is the increase in the government’s overall borrowing. Reducing gross borrowing has been difficult since it doubled in FY21, the year of the pandemic. Even though the fiscal deficit may decrease, most analysts predict that the total market borrowing for FY25 would stay around Rs 15.51 trillion.

This is due to the fact that market borrowings account for the majority of the government’s deficit funding, with the remainder coming from its different savings plans. Its primary source of funding to close the fiscal shortfall is the bond market. The magnitude of the government’s borrowing may keep interest payments high even though bond yields are predicted to be stable and even decline over the course of the upcoming fiscal year. Additionally, previous borrowings were more expensive, which raises the overall interest expense. Any benefit from FY26’s lower borrowing costs may be slight and primarily available in subsequent fiscal years rather than right away. Keep in mind that long-term bonds are how the government borrows money.

Solutions to managing interest payments
For interest payments to be less than 20%, gradual reduction in market borrowing, which would require the government to strengthen its alternative funding sources would be necessary. The plan would specifically need to improve its small savings schedules. Of course, it may also reduce its expenditures by increasing its efficiency.

Last Financial Year Scenario
According to a senior government source, the federal government’s interest payout is anticipated to increase by 11–12% in the upcoming fiscal year compared to the current fiscal 2024. An estimated Rs 10.80 lakh crore, or roughly 24% of the financial year’s budgeted expenses, was paid out in interest in FY24. Interest payments totaling Rs 6.12 lakh crore made up 22.8% of all expenses in the pre-Covid FY20 period.

Reasons for higher interest payment
The official told ET that although interest payments are expected to increase by 11–12% in the upcoming fiscal year, they are still manageable. A rise in borrowing is indicated by higher interest payments. The official claimed that because COVID shock boosted expenditure pressure, the government’s total debt had swelled.

Additionally, the conflict between Russia and Ukraine and the subsequent surge in global commodity prices caused the Center’s subsidy bill to rise in FY23, avoiding a more severe fiscal correction. The Center estimates that its fiscal deficit will be 5.9% in FY24 and aims to reduce it to 4.5% in FY26. International organizations have called attention to India’s high debt load. The IMF predicted that by FY28, the total debt of India’s states and the central government will reach 100% of GDP in the worst-case scenario and fall to less than 70% in the best-case scenario.

Net Tax Revenue increased
The administration emphasized that the debt was primarily in domestic currency and allayed concerns about the sustainability of the loan. The Center’s net tax revenue is expected to increase by 63.5% over the previous two years, from Rs 14.26 lakh crore in FY20 to Rs 23.31 lakh crore in FY24. According to estimates, its expenses increased by 67.6% from Rs 26.86 lakh crore in FY20 to Rs 45.03 lakh crore in FY24.

Former National Statistical Commission chairman Pronab Sen stated that while the high interest outgo is a problem, it is not yet reason for undue alarm. More crucially, the government needs to drastically increase its Tax-to-GDP ratio. This will deal with the interest load problem. He added that it will also be beneficial if the government reduces its fiscal deficit to the desired 4.5% of GDP by FY26.

For the last ten years, the gross tax-to-GDP ratio has stayed between 9.8% and 11.4%. Global agencies’ worries over India’s debt sustainability, according to Sen, may have been overblown, especially considering that the nation’s external debt only accounts for a small percentage of its total obligations.

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Renewable Energy Sector Awaits Budget 2025 for Key Support Measures

Stance on divestment and its impact on PSU stocks in the upcoming budget

Stance on divestment and its impact on PSU stocks in the upcoming budget

Stance on divestment and its impact on PSU stocks in the upcoming budget

Overview
Following the year 2020, there is a considerable mismatch between the projected divestments and the actual divestment occurred in the budgets so far. Currently, many experts believe that this time’s budget will have a reasonable approach in terms of setting targets for divestment. This year’s budget will have smaller targets than the targets planned in the budget year 2022 and 2023. This time projection will fall in the band of about Rs. 30,000 crore to Rs. 60,000 core.

Gap in divestment target
The divestment reached to about Rs. 9,000 crore until now compared to its target of Rs. 50,000 crore in the financial year 2024-2025. It indicates a huge gap in the actual action and projected plans of divestments. The stake sales of the government of India were done through offer for sale method. It sold its stakes in Hindustan Zinc, General Insurance Corporation of India, and Cochin Shipyard. It also received money from selling its shares in different companies and investments managed by specified undertaking of Unit Trust of India.

Impact of lower target
In the Budget 2025, the projection will fall in the band of about Rs. 30,000 crore to Rs. 60,000 core. Nomura Holdings, a Japanese brokerage firm, stated that India is suffering from getting less money from sale of its stakes in the companies. Also, it is facing the issue of fall in growth of nominal GDP. This will result in cancelling out the effect of savings made by the government due to lower capital spending on its projects. Despite this, the government is anticipated to keep its present divestment goal in the budget.

In case the government of India reduces the target of divestment which could be around Rs. 30,000 crore then it will be for the fifth year in a row that the budget has contracted the goals of divestments.

The underperformance or remarkable performance of divestment will not have a big impact on India’s financial position. It is because the share of divestment in the total revenue collection has become small in the duration of previous years. In the financial year 2025, it was about 1.6 percent.

Effects on Public Sector Undertaking Stocks
Nilesh Shah, managing director of Kotak Mahindra AMC stated that the government of India should carefully plan its budget. The sale of shareholdings of the government of India in non-core public sector units will help the country to reduce the fiscal deficit.

In the upcoming financial year 2026, the major sales of companies such as IDBI bank, BEML, Shipping Corporation, and NMDC steel are expected to be undertaken. These plans of selling shares will help the government to fufil the goals of divestment set in the financial year 2026.

In recent times, many investors are showing their interest in stocks of infrastructure and manufacturing sectors undertaken by the public sector. It has resulted in a hike in market capitalization of these companies which includes Shipping Corporation of India and NMDC Steel.

The stake sales of government in IDBI bank of about 60 percent will possibly be undertaken in the financial year 2026. To conduct a financial bid of IDBI bank, a thorough review is taken of the bank and it is going to be given to potential buyers.

The sale of shares of Shipping Corporation of India is expected to happen in the upcoming financial year as well. This company is the biggest shipping firm having about 70 vessels. It is being moved forward due to administrative hurdles in the process of divestment.

One of the other reasons for lower targets is also possibly due to the belief that public sectors in key areas are expanding their potential capacity.

The announcement of the divestment process of the companies normally leads to a hike in that stock. The reason for this is that investors think that privatization of a company will lead to expansion of profit levels. In present times, small goals of divestment will possibly lead to poor performance of that public sector stocks on the day of the budget announcement. Also, the market changes due to news of divestment will affect that particular stock and not the entire sector.

In conclusion, the government of India is getting its return from strong operational activities, core public sector units, and high attraction of investors towards PSU stocks. It is unlikely for the government to do large stake sales. Thus, investors having a stake in PSU stocks possibly need to find other reasons than news of divestment for hike in prices of these stocks.

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Budget needs to focus on local infrastructure

Expansion of capex to tackle global issues and decline in economic growth

Expansion of capex to tackle global issues and decline in economic growth

Expansion of capex to tackle global issues and decline in economic growth

In present times, India is facing the issue of moderate economic growth and global tensions. In this scenario, the upcoming budget focuses on keeping the same fiscal strategy which was implemented for the previous four years. The policy also focuses on the strategy of fiscal consolidation and at the same time keeping budget expenditure higher than before pandemic expenditure levels. Further, it resolves to expand capex rapidly than expenditure of revenue levels. It will help in reducing the fiscal deficit in the economy at a moderate rate. However, the reduction in fiscal deficit continues to be higher than the target set by FRBM. This will aid in public investments leading to growth in the medium term.

Factors helping reduction in fiscal deficit
Following the financial year 2021-2022, the capital expenditure has played a crucial role in improving the GDP of the country. The factors such as growth in tax collections on personal incomes, big dividends of RBI, and expansion of GST revenue will aid in contracting the fiscal deficit.

There is a crucial requirement of fiscal consolidation in order to achieve lower debt levels and its costs, and also leading to expenditure in productive areas.

Need for high capex
India has a long term goal of becoming a developed nation in the year 2047. To achieve this, it aims to develop its infrastructures in terms of railways, highways, clean energy aims for creating an energy generation capacity of 500 GWs in the year 2030, and a strong agricultural sector in terms of better climate risk management and storage facilities. With the help of the PLI scheme, it focuses on expansion of local manufacturing activities in key sectors in the country. These are the reasons that the outline of the budget plan continues to be the same for years.

Economic Performance
India recorded a moderate growth in GDP to about 6.4 percent. The reason for this is due to contraction in capital formation and public spending did not fulfil the target of 17 percent. Also, the investment share in the growth of GDP fell to about 2 percent in the current financial year compared to the previous financial year growth of about 4 percent. In the upcoming budget, it will concentrate on keeping the capital spending in the range of about 3 to 3.4 percent of the total GDP. It will be considered as the highest in the period of the previous 20 years.

The expansion of capex levels will aid in promoting private sector investments as well investments at state level. It will also encourage growth in the medium term and also maintain growth levels close to 6.5 percent in the upcoming periods.

Growth drivers
Compared to private consumption, investment plays an important role in expansion of growth in the long term. In present times, there are a lot of worries regarding contraction in private consumption due to low consumption levels in urban areas. However, it is projected to grow in the second half of the financial year 2025. There is also a need for tax reduction in personal income but it’s not possible due to slowdown growth of corporate tax, considering moderate manufacturing activity.

In present times, the tax-to-GDP ratio accounts to 11.6 percent compared to the 1.5 percent ratio during the before pandemic period due rise in GST collections. In order to expand GST collection, there is a need to ease the GST rates and also increase the average GST. Apart from this, it needs to bring products such as petroleum under the GST base.

Focus on import duties
Currently, India’s import duties are higher compared to other manufacturing countries like Vietnam and China in Asia. It has increased to about 17 percent in the year 2023 compared to 13.37 percent in the year 2015. The reason for high tariffs was to protect India from China’s dumping strategy and also to promote domestic manufacturing in key sectors such as electronics. However, the high level of tariffs are becoming harmful for India in terms of acting as a replacement for China in trade and also to adopt global supply chains. It also affects domestic production due to high tariffs on inputs. In present times, Trump is planning to impose duties on China. This could be a chance for India to shine but it will be affected due to high tariff levels. It needs to lower tariff levels to make the Indian manufacturing sector strong.

Government borrowings
It helps in covering fiscal deficit as well as affect the resources of the private sector. In the upcoming financial year, the government is anticipated to have expenditure of about 14.5 percent compared to current projection of 14.8 percent. While the spending on segments such as pension, salaries, subsidies, and interest payment will be about 11.3 percent. The capex is anticipated to be about 3.2 percent.

In terms of revenue collections considering both tax and non-tax revenue and deducting states’ shares, it will be about 10 percent. Further, the fiscal deficit is anticipated to account for 4.5 percent in the upcoming year compared to 4.9 percent in the current financial year.

The government aims to have gross borrowing of about 14 trillion and net borrowing of about 11.4 trillion. It is similar to the borrowing in the previous year indicating almost no change in the borrowing levels. It will only help in slight lowering of debt-to-GDP ratio. There is a need for reduction in debts and rapid economic growth.

In order to achieve rapid fiscal consolidation, the government is required to contract the budget base as per the previous pandemic levels but it will adversely affect capex. This is the reason why it needs to maintain the high capex. It can be supported by stable growth in revenue levels and also remaining unused capex funds can be used to maintain the strength of government investment. It will also help to protect from global uncertainties in the economy.

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Budget needs to focus on local infrastructure

Interest Payment Burden to reduce in FY26

Role of upcoming budget to enhance economic growth

Role of upcoming budget to enhance economic growth

Overview
Following the Covid-19 pandemic, many countries in the world suffered from aggressive contractionary monetary policy, high inflation levels, and constant geopolitical issues. In the midst of this scenario, India’s growth was a silver lining. The reason for this robust growth was government expenditure on the country’ infrastructure was unparalleled. It resulted in India recording the highest growth levels for each quarter compared to other major countries in the world. This trend went on for many quarters till the second quarter of the financial year 2025.

India recorded a 5.4 percent growth on a year-on-year basis in the September quarter of the financial year 2024-25. It was the most moderate growth in the period of the last two years. The Finance Ministry of India and Reserve Bank of India stated that the slump in growth is just temporary in nature and not a long-term shift of the economy towards moderate growth levels. Despite this, the scenario shown by the earning reports of the third quarter of non-financial firms was falling for the third quarter in a row. The only exception to this pattern was some of the big companies.

Due to this gloomy situation prevailing in the market, different segments in the economy are expecting a thrust from the Union budget for the economy of the country.

Factors needed for the economic growth
To boost economic growth, a country needs to fulfill the four factors of GDP which is investment from both public and private sector, net export levels (difference between exports and imports) and consumption.

After the Pandemic, the economic growth in India is strongly pushed by government expenditure. However, channels of government expenditure have crossed way beyond their capacity. In recent times, government expenditure is declining which has resulted in a decline in growth levels. In the second quarter of financial year 2025, the growth in investment by the government was just 4.4 percent. Looking at this situation, it is time for private sector investment to step in to promote economic growth in the country.

The export levels in the country are suffering from moderate growth. In the second quarter of the financial year 2025, the export growth fell to 2.8 percent year-on-year which is the most significant hindrance to economic growth. In contrast to this, the growth of consumption level in the same quarter was 6 percent year-on-year increasing. Also, the anticipated household consumption growth for this financial year is about 7.2 percent. In India, household consumption levels have more than half of the share in the growth of its GDP.

Despite this good situation in consumption levels, it certainly has its own issues too. After the Covid-19, the urban demand was high for a long period of time and now it has lost its breath. While, the major part of consumption level is contributed by increasing rural expenditure levels in the latest quarters. The rural expense has increased due to factors such as some government schemes (like MGNREGA) and favorable monsoon season.

To have robust economic growth in India, the government needs to encourage private investment, a push to export levels and strong urban demand.

Role of Budget
Tax relief is one of the important measures that the government of India is anticipated to take in order to encourage urban demand in the country. The contribution of personal income tax was about 53 percent in the total direct tax collection of the government in the financial year 2024. It showed that people pay more taxes compared to tax paid by companies. It is also important to consider the truth that about three percent of the population in the country gives taxes. It is quite concerning in terms of tax pressure on the people paying taxes. Taking this scenario in consideration, it is anticipated that the government will raise the exemption limit on earnings, providing high standard deduction, adoption of medical insurance deduction (Section 80D Deduction) in new tax policy, increase the limits on investments and saving on which tax deduction is allowed (Section 80C Limit), and make income tax brackets fairer.

In the case of private investment, the investment levels are quite inconsistent. Despite this, many new technology industries are growing with the help of government actions. This kind of support is anticipated to remain in future as well. However, government stimulus is constantly changing. For instance, initially the government of India was focusing on incentivising swapping of batteries but now it is focusing on creating more charging infrastructure. It is difficult to identify which incentive will perform well in the economy. However, it is important to understand that all the attempts of the government are focused on promoting these new technology industries.

Apart from this, many industries in the country are anticipating a fall in interest rates in the month of February and also rise in demand levels. In present times, these industries are working with high production capacity. They have high cash levels but not using it to invest in new plans. The reason for high cash is raised through various channels, particularly through IPOs in the year 2024. When consumption levels in the country will be raised then companies will start to use their cash. Also, they will go for loans in case of favorable stock market situations and fall in interest rate in the economy. However, these actions of the industries rely on the condition that consumption demand needs to rise.

Focus on fiscal consolidation
The government of India needs to focus on fiscal consolidation. In the current financial year, it should keep the fiscal deficit in the range of 4.9 percent and below 4.5 percent in the upcoming financial year. It would lead to financial reliability in the current situation of uncertainty.

In conclusion, the government of India needs to focus on tax reliefs and investment leading to creation of economic growth in the long term, along with focus on fiscal consolidation.

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India's Debt-to-GDP Ratio: Balancing Growth and Fiscal Prudence

India's Debt-to-GDP Ratio: Balancing Growth and Fiscal Prudence

India’s Debt-to-GDP Ratio: Balancing Growth and Fiscal Prudence

Overview
Since governments in both developed and emerging nations provided varying degrees of fiscal stimulus following the Covid epidemic, sovereign debt as a percentage of GDP has been a hot topic of discussion worldwide. In developed countries like the US, the debt-to-GDP ratio has risen to unmanageable levels notwithstanding the rollback of stimulus measures. India’s ratio needs to be watched even though it is low when compared to its immediate developing market rivals.

FRBM Act target not achieved
According to Barclays, since the peak of the pandemic year, the central government debt to GDP ratio has remained at about 60%. That is significantly more than the 40 percent threshold set by the Fiscal Responsibility and Budget Management Act (FRBM) to be met by FY25.

The goal set by the FRBM Act was for the total debt of the central and state governments to reach 60% of GDP by 2024–2025, with the central government’s debt standing at 40%. Following the pandemic, the FRBM targets were halted, necessitating an increase in government spending to bolster the economy.

Fiscal Deficit to reduce Debt
In her budget address last year, Finance Minister Nirmala Sitharaman stated that starting in 2026–2027, the fiscal policy will aim for a fiscal deficit that would assist in the debt’s downward trajectory. Although no specific goals were stated, the idea is that the amount of government debt must decrease. After all, the current administration has repeatedly emphasized the importance of economic restraint and prudence.

To reduce debt to 40 percent of GDP from the present 57 percent is a tall task and is unlikely to be achieved in a handful of years. Indeed, the need to boost spending, be it capex or revenue towards slowing sectors, has emerged yet again. With the economy facing a cyclical slowdown, the pressure of the government has increased to lift consumption through measures that would force the government to forgo tax revenue.

External Debt on the rise
According to the Finance Ministry, India’s external debt increased 4.3% from June 2024 to $711.8 billion as of September of this year. The external debt was $637.1 billion at the end of September 2023.

According to India’s Quarterly External Debt Report, the country’s external debt was $711.8 billion in September 2024, $29.6 billion more than it was at the end of June 2024. Further the report highlights that the external debt to GDP ratio was 19.4% in September 2024 compared to 18.8% in June 2024. With a proportion of 53.4% of India’s external debt as of the end of September 2024, the US dollar-denominated debt was still the highest, followed by the Indian Rupee (31.2%), Japanese Yen (6.6%), SDR (5.0%), and Euro (3.0%).

It stated that both the general government’s and the non-government sector’s outstanding external debt rose from June 2024 to September-end 2024. According to the report, loans accounted for the highest portion of foreign debt (33.7%), followed by currency and deposits (23.1%), trade credit and advances (18.3%), and debt securities (17.2%). Further, debt servicing (principal repayments plus interest payments) accounted for 6.7% of current receipts at the end of September 2024, up from 6.6% in June 2024.

Market Opinion
Speaking about the impending Union Budget and India’s overall economic prospects, Nadir Godrej, Chairperson of Godrej Industries Group, says that although a budget deficit may appear worrisome in the near term, it need not be detrimental if it fosters growth. In an interview with Siddharth Zarabi, Editor of Business Today, at the World Economic Forum in Davos, he stated that the debt-to-GDP ratio is the most important indicator to keep an eye on since it shows the nation’s total debt in relation to its economic production.

According to Godrej, India’s debt-to-GDP ratio would improve and worries about the sustainability of its debt would be allayed if the country’s economic growth rate rose from the anticipated 6.7% to 9%. According to him, if a budget deficit is properly employed to spur growth, then a certain amount of it is acceptable.

Godrej emphasizes the value of government capital spending, despite the fact that it could seem excessive at first. According to him, even if these expenditures may appear high up front, they produce worthwhile assets (such as public facilities, energy infrastructure, and roads) that will pay off later on, increasing productivity and stimulating the economy. Government investment on infrastructure and other long-term initiatives that support the expansion of the economy in the future is referred to as capital expenditure.

Conclusion
What is heartening is that fiscal deficit is likely to reduce to 4.5 percent of GDP for FY26 but that is a job half done. Financing this deficit in a way that does not require the government to borrow large amounts from the bond market is critical towards reducing the debt load. This is where it gets tricky for the budget.

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India Eyes Stronger Growth in FY25, Stays on Fiscal Target Path

India Eyes Stronger Growth in FY25, Stays on Fiscal Target Path

India Eyes Stronger Growth in FY25, Stays on Fiscal Target Path

India’s government is poised to project higher economic growth for the upcoming fiscal year, signaling optimism amid recent slowdown concerns. According to government officials, the anticipated nominal GDP growth is expected to be between 10.3% and 10.5%, surpassing the current fiscal year’s forecast of 9.7%.

This positive outlook aims to alleviate market apprehensions about an economic deceleration that have emerged since November. Despite this optimism, the economy is projected to experience its slowest growth in four years during 2024/25.

N.R. Bhanumurthy, director at the Madras School of Economics, considers the nominal GDP estimate for the next fiscal year to be realistic. He attributes potential growth to increased government capital spending, advancements in agriculture, and a resurgence in exports.

Finance Minister Nirmala Sitharaman is expected to announce personal income tax reductions in the forthcoming budget on February 1. This move aims to stimulate demand among salaried individuals who have curtailed discretionary spending due to sluggish wage growth and elevated food inflation.

Importantly, these tax cuts are not anticipated to derail India’s fiscal consolidation efforts. The government projects the current fiscal year’s budget deficit to be 10 to 20 basis points below the initially estimated 4.9%, partly due to spending delays caused by last year’s national elections and monsoons. Additionally, the target to reduce the fiscal deficit to below 4.5% in the forthcoming financial year remains intact.

Nominal economic growth, which combines real GDP and inflation, serves as a foundation for forecasting government revenue, expenditure, and deficits. Prime Minister Narendra Modi’s administration has previously implemented measures such as corporate tax reductions, production-linked incentives for manufacturers, and increased infrastructure spending to bolster growth.

Despite these initiatives, challenges persist. Job creation has not kept pace with the needs of the world’s most populous nation, and wage growth for urban salaried workers remains subdued. Consequently, discretionary spending has declined, exacerbated by significant increases in food prices, particularly vegetables.

Business groups are advocating for additional measures, including reductions in fuel taxes, sustained infrastructure investment, and lower import duties, to further stimulate economic activity.

In summary, while the Indian government is set to forecast stronger economic growth for the next fiscal year and remains committed to fiscal discipline, addressing underlying challenges such as job creation, wage stagnation, and inflation will be crucial to achieving these projections.

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Indian Gem & Jewelry Market Set to Grow from $85 Billion to $130 Billion by 2030

Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26

Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26

Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26

The Indian Government recently announced to focus on improving the quality of spending which would bolster the social security net and aim at bringing down the fiscal deficit to below 4.5% of GDP by the fiscal year 2025-26 (FY26). Government’s dedication to reduce the monetary deficit aligns with its willpower to financial prudence while ensuring financial increase and social welfare.

The Union Government has shown commitment towards its roadmap to fiscal consolidation as announced in the FY21-22 Budget which aimed at reducing the fiscal deficit to below 4.5% of GDP by FY 25-26. This dedication is showcased in the Finance Ministry’s half yearly review of fiscal trends which comply with the Fiscal Responsibility and Budget Management Act, 2003. These announcements were tabled at Lok Sabha last week in the light of the upcoming Budget for FY 25-26 in Parliament on 1st February.

Going in depth of the Finance Ministry’s document, this push will be improving the quality of government spending while enhancing social security for the needy and poor. This measure would strengthen the nation’s macro-economic parameters and support financial stability. In the Budget of FY25, capital investment was hiked by 33% to Rs. 11.1 trillion (3.3% of GDP). Investment such as infrastructure, manufacturing, etc. leading to long-term while creating employment.

This fiscal consolidation thrust comes at the time of global uncertainties which are caused by wars in Europe and the Middle-East which have created inflationary pressures and caused domestic and global challenges on the face of development. India’s fiscal deficit peaked during the pandemic period at 9.2% in FY21 throwing light on the emergency spending at the time of crisis. Since the pandemic the government is aiming at consolidating fiscal deficit while ensuring the much needed funding to crucial sectors of the economy. The government’s macroeconomic measures have insulated the nation from getting affected by global pressures.

Going into the specifics, the budget estimates (BE) for FY 24-25 projected government expenditure of around Rs. 48.21 lakh crore. Out of the total expenditure, around Rs. 37.09 lakh crore gets allocated to revenue expenditure (including operational and recurring costs) and the remaining amounting to Rs. 11.11 lakh crore for capital expenditure (included long-term investment in infrastructure and developmental projects). Of the total expenditure, Rs. 21.11 lakh crore was in the first half of FY25 of about 43.80% of the budget estimates. Further, the projected figures for capital expenditure by the government (Capex) was about Rs. 15.02 lakh crore. Additionally, the Gross tax Revenue (GTR) was estimated at Rs. 38.40 lakh crore with a tax to GDP ratio of 11.8%. While, total non-debt receipt stood at Rs. 32.02 lakh crore, which comprised tax revenue of about Rs. 25.83 lakh crore, non-tax revenue was about Rs. 5.46 lakh crore and capital receipt of about Rs. 0.78 lakh crore.

With the above estimates of the cost of procurement, the fiscal deficit in BE 2024-25 was pegged at Rs 16.13 lakh crore or 4.9 per cent of GDP. Deficit in FY25 H1 is estimated at Rs 4.75 lakh crore or about 29.4 percent of BE. Funding the financial crisis by raising Rs 11.13 lakh crore from the market (G-sec + T-Bills), draw the remaining Rs 5 lakh crore from other sources, such as NSSF, State Provident Fund, external debt, which is lower than residual income and immediacy.

Discussing the impact of fiscal deficit on markets, there is a positive nudge witnessed in market sentiment. India’s benchmark 10-year bond yield fell sharply over four years in 2024 as government fiscal discipline and the addition of debt to global indices boosted demand, as investors waited for the domestic rate easing in 2025. The yield ended at 6.7597% on Tuesday, down 42 basis points on the year after falling 15 bps in 2023. This was the biggest fall since it fell 66 bps in 2020. Bond yields started the year on a downtrend, continuing to prompt the government to cut its borrowing, while strong demand from domestic and foreign investors meant that supply was taken early. The government adhered to its fiscal plan and reduced its fiscal deficit target as well as market lending, at a time when corpus with long-term investors such as insurance and pension funds had grown.

In summary, the Indian government’s commitment to decreasing the fiscal deficit to 4.5% of GDP by FY26 at the same time as improving expenditure and getting closer to financial consolidation. However, reaching these goals will require navigating complicated demanding situations, inclusive of populist pressures, international uncertainties, and revenue mobilization constraints. By keeping a strategic cognizance on best spending and lengthy-term sustainability, India can make sure that its economic rules help strong and inclusive economic increase.

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Fiscal Discipline in Focus: Government Plans Deficit Reduction by FY26

Government Expands Capex, Keeps Deficit in Check

Government Expands Capex, Keeps Deficit in Check

As of July 24, 2024, the central government’s fiscal deficit has decreased to ₹1.41 lakh crore, down from ₹1.54 lakh crore in the same period last year. This positive trend reflects the government’s ongoing commitment to fiscal prudence and responsible economic management.

This reduction in fiscal deficit to two primary factors: a moderate growth in tax revenues and controlled government spending, according to a recent analysis by financial services firm Anand Rathi. The fiscal deficit for April-July 2024 was at ₹2.8 lakh crore, representing 17.2% of the annual target, indicating better budget control than the previous year. This marks a significant improvement from the previous year when the deficit had reached ₹6.1 lakh crore during the same period.

Interestingly, government expenditure during these initial months has been more restrained compared to the previous year. Capital expenditure, in particular, has seen a notable decrease of 17.6% year-on-year. This cautious approach to spending suggests that the government is carefully balancing its growth initiatives with fiscal responsibility.

Personal income tax collections have been a notable strength in the current financial environment, demonstrating resilience and outperforming expectations. As the deadline for annual tax returns approached in July 2024, these collections surged by an impressive 64% compared to the same month last year. This strong showing has resulted in personal income tax revenues reaching 33% of the budgeted target for the fiscal year 2024-25, indicating a healthy pace of collection.

The corporate tax situation is more nuanced and multifaceted compared to other areas of tax revenue. After briefly showing signs of recovery in June 2024, corporate tax collections have once again turned negative. This fluctuation is partly attributed to ongoing tax refunds, which have impacted the net collection figures. The volatility in corporate tax revenues highlights the challenges faced by businesses and the need for continued economic support and reforms.

On a more positive note, indirect tax collections have shown improvement, particularly in the realm of customs duties. Customs duty collections have significantly rose, posting a 29% increase compared to the same period last year. This increase could be indicative of recovering international trade volumes or changes in import patterns.

While divestment receipts have remained stagnant, suggesting potential challenges in the government’s asset monetization plans, there’s been a substantial boost in non-tax revenues. These have surged by 70% year-on-year, providing a welcome cushion to the government’s overall revenue position. This increase in non-tax revenues could be attributed to various factors such as dividends from public sector enterprises, fees, and other miscellaneous sources.

Government expenditure for the initial quarter of the fiscal year has reached 27% of the annual budget allocation, indicating a gradual recovery in spending patterns. This figure provides insight into the pace of government expenditure and its alignment with annual budgetary plans. July 2024 saw a mixed picture, with monthly revenue expenditure decreasing by 14% year-on-year, while capital expenditure rebounded strongly with a 108% year-on-year growth.

Despite this recent rebound in capital spending, it’s important to note that overall capital expenditure for the first four months of the fiscal year remains 18% lower than the previous year. This slower pace of capital spending can be partially attributed to the implementation of the model code of conduct during the first two months of the year, coinciding with the general elections. The subsequent recovery in spending after the elections has been limited, as the government awaited the full-year budget announcement.

The government expenditure is expected to accelerate in the coming months. This anticipated increase is likely to be triggered by the release of funds following the Parliament’s approval of the finance bill. As budgetary allocations are formalized and disbursed, we can expect to see a pickup in both developmental and welfare spending.

A significant boost to the government’s fiscal position has come from an unexpected quarter – the Reserve Bank of India (RBI). The government’s finances received a significant boost from the central bank’s unprecedented dividend payment, which amounted to ₹2.11 lakh crore. This windfall, combined with the strong performance of personal income tax collections, has created a more favorable fiscal environment. These positive developments may help offset potential shortfalls in other areas, particularly in divestment collections, which have yet to gain significant momentum this fiscal year.

The government’s ability to maintain this balance between fiscal prudence and necessary expenditure will be key to supporting India’s economic growth trajectory. Factors such as global economic conditions, domestic consumption patterns, and the pace of structural reforms will all play important roles in shaping the fiscal outcomes for the remainder of the year.

In conclusion, the latest fiscal data presents a picture of cautious optimism. While challenges remain, particularly in areas like corporate tax collections and divestment proceeds, the overall trend suggests that the government is making strides in its fiscal consolidation efforts. The coming months will be critical in determining whether this positive momentum can be sustained and translated into long-term economic benefits for the nation.

The image added is for representation purposes only

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