Top economists on Wednesday urged the Finance and Corporate Affairs Minister Nirmala Sitharaman to stick to earlier announced fiscal deficit glide path while presenting the first comprehensive budget of Modi 3.0 government next month.

Attendees of the first pre-budget consultations chaired by Sitharaman at North Block suggested that the upcoming budget should avoid excessive populism and remain focused on fiscal consolidation, sources said.

This is significant because considering the recent election outcomes, the Modi 3.0 coalition government is widely expected to adopt a populist stance in the upcoming Budget and shift its policy towards more inclusive growth. 

Fiscal headroom

The upcoming full Budget will be keenly watched for how the government will use the fiscal headroom provided by RBI’s recent dividend bounty of ₹2.1 lakh crore. 

Immediately after assuming office, the Centre has sought to address the voting gaps in farm-heavy States and rural markets. The two immediate decisions of financial assistance to build 30 million new houses in rural and urban areas and release of the farmer welfare instalment of ₹2,000 are clear pointers to policy shift towards boosting spends in rural India, economy watchers said.

The Interim Budget for 2024-25 had pegged the fiscal deficit for the current fiscal at 5.1 per cent as against 5.6 percent at revised estimate stage in 2023-24. For 2025-26, fiscal deficit target has been pegged at 4.5 percent of GDP.

The more-than-two-hours-long pre-budget meeting on Wednesday saw discussions around key issues facing the economy including boosting employment growth, controlling food inflation, inflation targeting and direct tax reforms, sources added.

Tech pivot

Economists came up with suggestions around sustaining the emerging cycle of private investment; enabling work force to take advantage of technology based opportunities and how to make technology advancement without labour displacement, they added.

On inflation targeting, which was formally adopted in 2016, there were some suggestions on the need to review the median rate of 4 per cent. 

The existing framework, which would be valid till March 2025, sets a medium-term inflation target of 4 percent, with a tolerance band of ±2 per cent, meaning inflation should ideally remain between 2 per cent and 6 per cent. This target is based on the Consumer Price Index (CPI), which reflects the average change over time in the prices paid by consumers for a market basket of goods and services.

Economists’ take

At the pre-Budget meeting, different economists had varying takes on this topic of inflation targeting.  TCA Anant, former Chief Statistician and MOSPI Secretary said that he had at the pre-budget meeting highlighted the literature around divergence between Consumer Price Index (CPI) and Wholesale Price Index (WPI) in India. This is a recent phenomenon in India (disconnect between CPI and PPI happened globally in last 10-12 years) and not recognising this creates challenges for inflation targeting in India, he said.

“My suggestion is to revisit the thing and start a process to re-examine the target. I have also suggested that CPI index needs to be revised and announced in the first hundred days of government”, Anant told businessline after the pre-budget meeting. 

Besides Sitharaman, the meeting was attended by Minister of State for Finance Pankaj Chaudhary, Finance Secretary T V Somanathan, Economic Affairs Secretary Ajay Seth, Revenue Secretary Sanjay Malhotra, DFS Secretary Vivek Joshi and Chief Economic Advisor Anantha Nageswaran.

The economists and experts who attended the meeting include Ashwani Mahajan, National Co-convenor, Swadeshi Jagaran Manch; Poonam Gupta, Director General, NCAER; Santanu Sengupta, Chief India Economist Goldman Sachs, Aarati Krishnan, Consulting Editor, businessline, Madan Sabnavis, Chief Economist, Bank of Baroda and Dharmakirti Joshi, Chief Economist, CRISIL.

Meanwhile, Pankaj Chaudhary said in a X post, “The meeting discussed efforts to accelerate economic measures related with 25 years road map to achieve the developed nation status. Our aim is to provide best living standard and ensure sustained pace to efforts for antyodaya”.