By Ruchi Bhatia
Prime Minister Narendra Modi’s government will likely reduce its fiscal deficit target slightly, according to people familiar with the matter, signaling an intent to keep a grip on finances as speculation grows about increasing demands from allies.
The gap for the year through March 2025 could be 5 per cent of gross domestic product or even lower, the people said, compared with the 5.1 per cent target set before the national elections. A final decision is expected to be taken in the coming days before Finance Minister Nirmala Sitharaman gives her budget speech on July 23, they said.
Modi returned to power only with the support of coalition partners, who have been seeking more money for their states. They have already put demands on the table for more than Rs 1 lakh 25 thousand crores in financial aid for the states they run.
While there is pressure to spend more, government finances are boosted by a big dividend transfer from the central bank and healthy tax collections in the world’s fastest-growing major economy, the people said, asking not to be identified before the official budget announcement.
A spokesperson for the Finance Ministry didn’t respond to a request seeking comments.
Economists in a Bloomberg survey also predict the deficit target will be cut to 5 per cent, allowing the government to keep its borrowing unchanged at Rs 14,10,000 crore this fiscal year. A lower-than-expected deficit could give an extra fillip to India’s bond market, where benchmark yields are edging toward a two-year low.
Benchmark 10-year bond yields were little changed at 6.97 per cent Friday.
“The market has discounted a fiscal deficit of 5 per cent from expectations of 5.1per cent earlier, with a deficit below 5 per cent of GDP likely to move the market,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank, “Any dips in bonds right now is a buying opportunity.”
A windfall gain of Rs 2 lakh 9 thousand crore in dividend from the central bank has created the headroom for extra spending. Net direct tax collections have also grown at about 20 per cent in the fiscal year through July 11.
India’s fiscal plans are coming under more scrutiny than before after its bonds were included in key global indexes last month. Credit rating companies are considering upgrading India’s debt if the fiscal metrics improve.