India's fiscal deficit for the financial year 2024-25 is projected to be 4.75% of the gross domestic product (GDP), 19 basis points (bps) lower than the budget estimate of 4.9%, according to India Ratings and Research (Ind-Ra). The projection aligns with the central government's commitment to fiscal consolidation, targeting a fiscal deficit below 4.5% by 2025-26, as announced by Finance Minister Nirmala Sitharaman during her July Budget speech.
Economic Activity and Fiscal Consolidation
Ind-Ra highlighted a modest slowdown in economic activity during the first half of FY25, partially due to reduced government spending. Despite this, the agency noted the government's history of exceeding fiscal consolidation commitments, predicting that the deficit for FY25 will remain lower than anticipated.
The agency found the fiscal outlook for FY25 promising, citing an increase in the tax-to-GDP ratio and disciplined spending. Gross and net tax revenues are expected to reach a 17-year high, contributing 12% and 8% of GDP, respectively. Income tax and corporate tax are estimated to account for 81% of the gross tax revenue increase.
Capital Expenditure Growth and Challenges
While FY25's capital expenditure (capex) is expected to grow by 10.6% year-on-year, reaching Rs 10.49 lakh crore, it falls short of the 17.6% growth budgeted for FY25. Ind-Ra attributed this slowdown to the general elections in May 2024, which impacted government spending.
The capex-to-GDP ratio is projected to be at a two-decade high of 3.21%, demonstrating the government's focus on infrastructure development despite some slippage in subsidy control.
Tax Revenue Performance
Corporate and income tax collections have shown strong growth during the first half of FY25. Corporate tax revenue rose by 11.2% year-on-year as of November 10, 2024, while income tax collections surged by 22.6%. GST collections are expected to meet budget targets, with net tax revenue projected to exceed budget estimates by 0.16% of GDP.
Non-Tax Revenue and Disinvestment Shortfalls
Despite robust tax collections, Ind-Ra cautioned about underperformance in non-tax revenue and disinvestment targets. These shortfalls could pose challenges to maintaining fiscal discipline in the long term.
Commitment to Fiscal Targets
Ind-Ra reaffirmed the government's commitment to achieving its fiscal deficit target of 4.5% by FY26. The agency emphasized the importance of maintaining fiscal prudence while continuing to invest in key infrastructure projects to support economic growth.
India's fiscal performance in FY25 reflects a balance between fiscal discipline and developmental priorities, with strong tax collections providing a cushion against spending pressures. This progress underscores the resilience of the Indian economy amid evolving global and domestic challenges.
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