India's Fiscal Deficit to Narrow by 19 bps; Tax Revenues to Hit 17-Year High in FY25

India's fiscal deficit likely to be 19 basis points (bps) lower at 4.75 per cent of the gross domestic product (GDP) than the budget estimates during the fiscal year 2024-25, according to India Ratings and Research (Ind-Ra). Finance minister Nirmala Sitharaman said in her July budget speech that the fiscal deficit to be at 4.9 per cent of the GDP in the current financial year, and below 4.5 per cent in 2025-26.

High-frequency indicators listed some slowdown in economic activity during the first half of the year, partly led by slower government spending, Ind-Ra said on Wednesday.

“In recent times, the union government has overachieved from its fiscal consolidation commitments made in the union budget,” said Ind-Ra.

Attributing to these factors primarily, the agency predicted that the fiscal deficit in 2024-25 would remain lower than budgeted.

The agency noted that the central government is committed to achieving the fiscal deficit target of 4.5 per cent in FY26. Ind-Ra further found the government’s fiscal outlook for FY25 promising with the tax/GDP ratio expected to be higher than FY25. Despite some slippage on subsidies from FY25 levels, the capex is expected to be around Rs 62000 crore lower than the FY25 of Rs 11.11 lakh crore.

“Even with this slippage, the capex in FY25 is estimated to have grown 10.6 per cent as against BE of 17.6 per cent,” said Devendra Kumar Pant, Chief Economist and Head Public Finance, Ind-Ra.

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The capex growth was impacted by the general elections in May this year. The capex to GDP ratio is estimated to be at a two-decade high at 3.21 per cent, Ind-Ra added.

As per the further predictions made by the agency, the FY25 gross and net tax revenue will reach a 17-year high with over 12 per cent and 8 per cent of GDP respectively. The gross tax revenue in FY25 is forecasted to be 28 bp of GDP higher than FY25. Income tax and corporate tax are estimated to contribute around 81 per cent and over 10.5 per cent respectively to the additional gross tax revenue.

However, while tax revenues are expected to show improvement, non-tax revenues and disinvestment will likely underperform.

Furthermore, corporate tax growth in the first half of the FY25 between April and September period set a highly for the second half. Till November 10, 2024, corporate tax collections have grown by 11.2 per cent year-on-year, while income tax collections are up 22.6 per cent year-on-year. GST collections are likely to align with budget expectations. Overall, net tax revenue is projected to be slightly higher, by 0.16% of GDP, than the FY25 budget target, according to Pant.