Budget 2024: Shifting focus from fiscal deficit to debt-GDP ratio

“The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5 per cent next year. The Government is committed to staying the course. From 2026-27 onwards, our endeavour will be to keep the fiscal deficit each year such that the Central Government debt will be on a declining path as percentage of GDP,” Finance Minister Nirmala Sitharaman said while presenting the Budget.

The government had pegged the fiscal deficit target at 5.9 per cent of the GDP in Budget 2023-24, which it was able to lower to 5.8 per cent in the revised estimates. The Budget 2024-25 documents presented on Tuesday showed that as per the ‘provisional actuals’ data, fiscal deficit for FY24 stands at 5.6 per cent of the GDP.

“There is a commitment to lower the debt-to-GDP ratio. So every year it has to be reduced. There will necessarily have to be a particular level of deficit which we cannot exceed and that will depend on prevailing growth rates, interest rates and other parameters, which go into the calculation of the debt dynamics. But I can tell you that it is most likely to be a figure, not above 4.5 per cent,” Finance Secretary TV Somanathan said in a media briefing after the Budget.

Somanathan also said that the government hereon would focus more on the debt-GDP ratio than fiscal deficit. “There is an approach which is outlined in that sentence which is that hereafter it is not the intention to focus on a deficit number but rather to look at what will keep reducing our debt-to-GDP ratio in normal years. The reason for this is a fixed figure which historically was enshrined in the FRBM Act in the past does not take into account the specific dynamics of the fast growing economy like India…what is sustainable in a fast growing economy is very different from the debt which is sustainable in a slow growing economy. India is today the fastest growing large economy in the world. The deficit which we can support, without expanding our debt, is not necessarily 3 per cent, it is much more than 3 per cent. It is probably less than 4.5 per cent but without getting into specifics, yes, it is a new approach that the government has spoken about,” he said.

The lowering of the fiscal deficit in FY24 has come on the back of a sharp compression of revenue expenditure and lower capital expenditure or capex. Revenue expenditure fell by 1.3 per cent from the revised estimates for FY24 to Rs 34.94 lakh crore in the provisional actuals. Capex also reduced in FY24 to Rs 9.49 lakh crore, 0.2 per cent lower than the revised estimates and 5.2 per cent or Rs 52,455 crore lower than budget estimate for FY24.

The government finances gained on the back of a sharp rise in tax and non-tax revenues. Tax revenues have grown 10.9 per cent year-on-year to Rs 23.27 lakh crore in FY24. Non-tax revenues also rose 40.8 per cent from previous fiscal to 4.02 lakh crore in FY24. For FY25, tax revenues have been estimated to rise 11 per cent to Rs 25.83 lakh crore, while non-tax revenues are seen rising 35.8 per cent to Rs 5.46 lakh crore. For FY25, the government stuck to the capital expenditure target of Rs 11.11 lakh crore set out in the interim budget, marking an increase at a slower rate of growth compared to previous years at 17.1 per cent over the provisional actual number of Rs 9.49 lakh crore in FY24.