New Delhi: Union Finance Minister Nirmala Sitharaman during the winter session of Parliament, in New Delhi on Tuesday, December 20, 2022. (PTI Photo/Manvender Vashist Lav)(PTI12_20_2022_000241B) | Photo credit: Manvender Vashist Lav

Finance Minister Nirmala Sitharaman will continue on the path of fiscal consolidation and will opt to reduce the fiscal year 24 budget deficit to 5.8% in the next budget, analysts said on Tuesday.

The government could opt for a fiscal deficit figure that will be well below the 6.4% of GDP budgeted for FY23, they said, setting the budget figure for the next fiscal year at between 5.8 and 6%.

Given that this will be the last full budget of the current government, the temptation to make it an expansionary budget could be strong. In the two years following the pandemic, the budget deficit – one of the key parameters for assessing macroeconomic stability which also influences inflation – increased to 9.3%.

India will have to continue on this path of fiscal consolidation and it does not have the luxury of stopping for the next few years, analysts have made clear.

“The fiscal consolidation path promised by the government will require a Herculean effort over the next few years. Think of it as a long-distance cyclist who has to keep pedaling hard to reach the finish line; if he were to stop suddenly, it is likely to fall,” HSBC India chief economist Pranjul Bhandari said in a note.

“A lower fiscal deficit is essential for India’s macroeconomic stability, especially in an uncertain global environment,” she added.

SBI economists said they expected the budget, due to be announced on Feb. 1, to peg the budget deficit at nearly 6%.

“The FY24 budget presents a challenge for the government to stick to the roadmap for fiscal consolidation, in a global environment of falling inflation,” the SBI economists said.

They added that India will need to grow at a faster rate to make this possible, given its estimates on spending and revenue mobilization.

SBI economists expect spending growth of 8.2% but a lower subsidy bill and revenue growth of 12.1%.

On the borrowing front, all analysts expect government borrowing in the market to be indexed higher in FY24.

Japanese brokerage firm Nomura, which pegged the budget deficit at 5.9%, said gross borrowing would rise to ₹15.5 lakh crore from ₹14.2 lakh crore in FY23, while the SBI estimated it at ₹16.1 lakh crore.

In its note, HSBC said the year before the election is generally associated with low privatization revenue and spending pressures, and included it among the challenges the government is expected to face.

Markets will seek transparent and credible tax calculations, direct tax reforms, lower tariffs on imports and a push for capital spending in the budget, he added.