MUMBAI: Govt will likely exceed its fiscal deficit consolidation target in FY25 due to reduced capital expenditure (capex). For FY26, the target is expected to be supported by a substantial dividend from RBI.
“Govt will likely outperform its FY25 fiscal consolidation target, closing the year at 4.8% of GDP versus the budgeted 4.9%, driven by weaker-than-budgeted public capex due to slower approvals in an election year,” said Pranjul Bhandari, economist at HSBC. Bhandari added that achieving the FY26 target of “below 4.5% of GDP” will require cuts in current expenditure, such as subsidies and centrally sponsored schemes, which may be challenging amid weak growth.
FM Nirmala Sitharaman will present the Budget for FY26 on Feb 1. While slower growth will impact tax collections, govt has not spent all that it has budgeted for.
Aastha Gudwani, chief economist at Barclays, expects the FY2024-25 fiscal deficit to come in below the target and anticipates the FY2025-26 target to be set at 4.5% of GDP. “The key ask is to support growth while adhering to fiscal consolidation. We expect the government to overachieve the FY2024-25 fiscal deficit target by 20 basis points at 4.7% of GDP,” said Gudwani.
Sonal Varma, chief economist at Nomura, projects the FY25 deficit at 4.8% of GDP, supported by lower capex, and expects the FY26 target to be pegged at 4.4%. CareEdge Ratings also forecasts a fiscal deficit of 4.8% for FY25, with the FY26 target at 4.5%, which is aligned with the medium-term fiscal roadmap.
Additionally, borrowing for FY26 may decline, aided by a record RBI dividend, estimated between Rs 1.5-2 lakh crore. Gains from RBI’s forex interventions and interest from repo lending are expected to bolster its profits.
“RBI’s forex reserves peaked at $705 billion in mid-Sept when the rupee was 83.6 against the dollar. RBI has sold a large amount after the rupee crossed the 85/$ mark. Even if the gain is only Rs 2 on every dollar sold, given the size of the intervention, the central bank would have record profits,” said a dealer. The earnings would be further enhanced by the interest earned by RBI from lending to banks through repo in the money markets.
