Government on course to meet fiscal deficit target for FY24 as gross tax receipts hit a 20-year high

• Economists are of the view that the government is on track to achieve the fiscal deficit target of 5.3% in the short term.
• In the first eight months of the fiscal year, the fiscal deficit has shrunk to Rs 9.06 trillion (50.7% of Budget Estimates) on a year-to-date basis.
• HSBC says that taxes are likely to grow quickly in FY25 as well and it is assuming tax buoyancy of 1.1.

It’s that time of the year when economists keenly analyse government finances and take stock of the fiscal deficit. The last several years have been challenging for governments across the globe as the pandemic impacted growth and deficits. This was soon followed by rising inflation and slower growth. But India may buck the global trend as tax receipts have remained buoyant, which will help the central government meet its fiscal deficit target set for FY24 at 5.9%. In the short run, economists believe that the government is on track to achieve the fiscal deficit target of 5.3% in the short term. Tax revenues have soared and overall revenues are running 0.3% of GDP higher than budgeted.

According to State Bank of India’s Chief Economic Adviser Soumya Kanti Ghosh, gross tax revenue at 11.6% of GDP in FY24 is likely to be a 16 year high. In FY25, he expects gross tax revenue to be at the highest ever in the last two decades. “We believe fiscal deficit in absolute terms could decline in FY24 but as a % of GDP it could be at 5.9% and likely to be set at 5.5% in FY25 Interim Budget. The final budget to be presented in July could set it at lower level of 5.3%-5.4% depending on GDP numbers that will be released in May 2024.”

In the first three quarters of the fiscal year, the fiscal deficit has shrunk to Rs 9.06 trillion (50.7% of Budget Estimates) on a year-to-date basis, compared to Rs. 9,8 trillion (58.9% of BE) in FY23. According to the strategy team at Centrum, the government is likely to meet its yearly target of fiscal deficit. This is thanks to the robust collections of both direct and indirect taxes.

While the government continues to fund the fiscal deficit through market borrowings, this number is substantially lower this year than it was in the comparable period last year. The financing of the fiscal deficit continues to be primarily met through market borrowings. Market borrowing by the government has contracted by an estimated 7% during YTDFY24 to Rs 9.6 trillion against the comparable period last year.

Tax and non-tax receipts have been higher this year compared to the previous one, even though the divestment receipts are only at 17% of its target of Rs 0.51trillion set in FY24. According to HSBC, soaring tax buoyancy saved central targets. “The fiscal deficit is likely to be in line with the budgeted 5.9% of GDP in FY24. Taxes are likely to grow quickly in FY25 as well (we assume tax buoyancy of 1.1). We also expect a normalisation in current expenditure post elections, and unchanged and elevated capex momentum. This is likely to lead to a fiscal deficit of 5.3% in FY25, signalling that the government is committed to its fiscal consolidation path (of a 4.5% deficit by FY26),” adds HSBC.

Centrum’s strategy team is of the view that the government can comfortably meet the fiscal deficit target with tax receipts and transfers from the Reserve Bank of India and public sector enterprises.