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The Centre is mindful of the mounting debt caused by deficits and is now determined to control it
| Photo Credit:
Foryou13
Recent data released by the Controller General of Accounts reveals that the Centre has managed to meet the revised target for fiscal deficit for FY25, retaining it at 4.8 per cent of GDP. But achieving this target was obviously not a cakewalk, given the dip in corporate profitability and weakness in several segments of the economy in FY25. This is evident in provisional tax revenue falling short by 2.3 per cent compared to the revised estimates.
While income tax collection in FY25 was 17 per cent higher than in FY24, corporate tax collection grew at just 8.3 per cent as sectors including IT, banking and auto decelerated. Customs and excise duty collections were marginally lower due to policy changes and a weaker domestic and external environment. The Centre was able to reduce the fiscal gap last year with the help of lower revenue expenditure and surplus transfer from the RBI. Revenue expenditure, which accounts for over three-fourths of the Budget expenditure, was 2.6 per cent lower than revised estimates in FY25, indicating that the Centre trimmed expenses to meet its deficit target.
It is well that the Centre is mindful of the mounting debt caused by these deficits and is now determined to control it. It had laid out a path for fiscal consolidation in the recent Budget, aiming to bring the debt-to-GDP ratio down to around 50 per cent by March 2031. But staying on course may prove challenging going ahead. The ongoing tariff war is likely to disrupt global supply chains, hurting the external sector. The uncertainty is making companies postpone fresh projects, impeding capital investments. Meeting the fiscal deficit target of 4.4 per cent of GDP for FY26 may be a challenge given the assumption of nominal GDP growth at 10.1 per cent in the Union Budget. With inflation projected to fall, nominal growth could be lower than what was budgeted for. The record high RBI dividend of ₹2.68 lakh crore for 2024-25, which is higher than the ₹2.56 lakh crore budgeted as receipts from the RBI and the dividend receipts from public sector banks, could help shore up the fiscal situation this year.
The impact of the large cuts in income tax rates for individuals is yet to be known. If it translates into better compliance and greater consumption, tax collections can remain strong. If consumers fail to spend the extra money in their hands, the Centre’s bet on both tax collections and GDP growth could come unstuck. Meanwhile, the Centre will have to ensure that it does not cut down its budgeted capital expenditure of ₹11.2 lakh crore this year, given the risks to growth. It is comforting to note that the actual capital expenditure for FY25 was 3.3 per cent higher than the revised estimate. Clearly, it does appear that the heavy-lifting will yet again have to be done by the Centre this fiscal year.
Published on June 9, 2025
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