Centre lowers fiscal deficit target, divestment goals; increases capex target
Finance Minister Nirmala Sitharaman has announced a fiscal deficit target of 5.1% for 2024-25, a decrease from the revised 5.8% for 2023-24. The goal is to reach below 4.5% of GDP by 2025-26. Sitharaman also lowered the divestment target for FY24 to Rs. 30,000 crore from Rs. 51,000 crore and set the target for FY25 at Rs. 50,000 crore. She also proposed to raise the capital expenditure target by 11.1% to Rs. 11.11 lakh crore for FY24.
Fiscal deficit reduction driven by strong tax collections
For the first nine months of this fiscal year, India's fiscal deficit was at Rs. 9.82 lakh crore or 55% of annual estimate. Strong tax receipts, with direct tax collections surpassing 81% of the budget estimate by January 11, have provided fiscal flexibility. Additionally, the Reserve Bank of India's transfer of Rs. 87,416 crore as surplus to the Central government has boosted non-tax revenue. This tax collection momentum is expected to continue in the upcoming financial year.
Divestment targets missed for fifth consecutive year
Although Air India and Neelachal Ispat Nigam Limited were successfully privatized in 2022, the government's divestment plans have fallen short for the fifth consecutive year. The government has only raised Rs. 10,051.73 crore this financial year so far, mainly through Central Public Sector Enterprises (CPSEs), IPOs, and Offer For Sales. Analysts predict that privatization of companies like Bharat Earth Movers Limited, Shipping Corporation of India, HLL Life Care, NMDC Steel, and IDBI Bank may only happen after the elections.
Poor bids, employee unions major hurdles in divestment
The government had to abandon the divestment of BPCL due to poor reception during bids, which aimed to raise around Rs. 50,000 crore. Employee unions have opposed the sale of RINL and Vizag Steel, and the divestment of SAIL's Salem steel plant was canceled due to a lack of bidder interest. In response to external uncertainties and stock market fluctuations, Finance Ministry has adopted a 'prudent sell-off' approach, focusing on selling assets at the right price and considering investor interests.
Divestment methods and actual receipts falling short
Over the past six years, key methods of disinvestment have included exchange-traded funds, offer-for-sale, strategic disinvestment, share buybacks, and IPOs. However, actual receipts from divestment have not met budgeted estimates since FY19. Except for FY18 and FY19, the Centre's actual receipts from divestment have consistently fallen short of estimates since 2010, with targets becoming more ambitious each year. The government's current approach prioritizes investor interests and avoids pursuing divestment just for its own sake.
Why fiscal deficit and divestment are significant markers for government
In simple terms, fiscal deficit refers to the difference between government's income and its expenditure. A temporary increase in the fiscal deficit can accelerate a slow-moving economy by providing individuals with financial capacity to buy and invest. However, long-term high deficits can negatively impact economic growth. Meanwhile, divestment refers to the selling of state-owned companies, assets or subsidiaries for a better long-term economic betterment of the country. It is also referred as privatization.
Capex increase aligned with India's rise as 3rd biggest economy
While proposing a 11.1% increase in government's capital expenditure, Sitharaman sought to boost demand and consumption. The increase will now amount to capital expenditure being 3.4% of the GDP. The government is expected to spend more money on boosting infrastructure by mostly constructing as roads and railways. The measure is aimed at transforming the Indian economy which aspires to overtake Japan and Germany and become the world's third biggest economy in terms of GDP by 2025.
