India’s government will not be able to cut its budget deficit this fiscal year as previously projected, officials said, but will seek to cap the shortfall at last year’s level to prevent a major deterioration in public finances.
Efforts to maintain fiscal discipline reflect New Delhi’s concern around risks to its sovereign credit rating but will likely limit the government’s firepower to check inflation and provide relief to households and businesses.
In February, the government set a fiscal deficit target of 6.4% of GDP for the year to March 2023, compared with a deficit of 6.7% in the last financial year.
The sources said that while increased spending to provide relief from inflation meant the government would miss this year’s target, policymakers would seek to limit the deviation to 30 basis points.
“We will try to contain the slippage to last year’s levels,” one of the officials, who declined to be identified, told Reuters.
Surging costs forced India in May to cut fuel taxes and change duty structures, hitting revenues by about $19.16 billion, while added fertiliser subsidies lifted expenditure.
The government and central bank have scrambled to contain prices through fiscal measures and monetary tightening after inflation jumped to multi-year highs.
Risks of slippage
The government is wary of the risks fiscal slippage poses to its sovereign credit ratings. Its debt to GDP ratio, which stands at about 95%, is significantly higher than the 60-70% levels for other, similarly rated economies.
That leaves the government little room to provide additional relief, as the May measures are already expected to drive up the deficit by more than 30 basis points if revenue collection does not exceed the budget target.
“The government can definitely do more but at what cost? If more steps are taken, it will require additional market borrowing and that will drive up yields and eventually cause higher inflation,” said a second source who is aware of the discussions.
The government is reluctant to expand its record market borrowing programme of Rs. 14.31 lakh crore this fiscal, both officials said.
“From here on, monetary policy will bear the larger burden of initiating inflation-growth corrective balance,” said Shubhada Rao, senior economist and founder of QuantEco Research. “The first quarter has been good in terms of tax collection, but... the excise cut could neutralise it,” she added.