Budget 2023: India Targets FY24 Fiscal Deficit At 5.9%; Gross Borrowings At Rs 15.43 Lakh Crore

India’s fiscal deficit for the ongoing financial year was in line with the government's budget estimates.

The government will target a fiscal deficit of 5.9% for FY24, Finance Minister Nirmala Sitharaman announced in her Budget 2023 speech. The country’s fiscal deficit settled at 6.4% in FY23, which is the same as the budget estimate.

“In Budget 2022, I had announced that we plan to continue the path of fiscal consolidation, reaching a fiscal deficit of below 4.5% by 2025-26, with a fairly steady decline over the period," Sitharaman said. "We have adhered to this part, and I reiterate my intention to bring the fiscal deficit to below 4.5% of GDP.”

States will be allowed a fiscal deficit of 3.5% of the GDP in FY24, she said.

The narrower fiscal deficit target underscores commitment to longer-term fiscal sustainability and supports the economy amid high inflation and a challenging global environment, according to Christian de Guzman, senior vice president at Moody’s Investors Service.

"Although the gradual fiscal consolidation trend remains intact and will help to stabilize the government’s debt burden relative to nominal GDP, the high debt burden and weak debt affordability remain key constraints that offset India’s fundamental strengths, including its high growth potential and deep domestic capital markets," he said.

Fiscal deficit had risen from 3.8% of GDP in FY20 to 9.5% in FY21, as the Covid-19 crisis led to a blowout due to increased development and welfare-related expenditures to contain the pandemic.

The government would continue on its path of fiscal consolidation to attain a fiscal deficit below 4.5% by FY26 through a fairly steady decline over this period, the government had said in the previous budget.

The promised fiscal consolidation path will require a herculean effort over the next few years, Pranjul Bhandari, chief economist at HSBC, said in a note.

"Think of it like a long-distance cyclist that needs to keep pedalling hard to reach the finish line; if it were to suddenly stop, it risks falling over," she said in a pre-budget note. The stakes aren't quite the same, but a lower fiscal deficit is key for India's macro stability, especially in an uncertain global environment, Bhandari said.

Lower nominal growth, upcoming general elections and the thrust on capex are some of the challenges the government faces amid efforts of fiscal consolidation, she said. Despite these, the fiscal deficit is expected to fall in line with the glide path, aided by a lower subsidy bill, she said.

Even as fiscal deficit was targeted lower, the government borrowings remain elevated. India is estimated to borrow Rs 15.45 lakh crore via bonds in FY24, Sitharaman said, with net borrowings at Rs 11.8 lakh crore.