Staying put on the fiscal deficit glide path so that it comes down below 4.5 per cent by fiscal 2026 will require the government to moderate its capital expenditure (capex) momentum seen in recent years, according to a CRISIL Market Intelligence & Analytics report.

Crisil team

But even if this was to happen, the capex share in GDP would remain marginally over the pre-pandemic rates, implying that the capex thrust to the economy remains, said CRISIL’s team of economists comprising Dharmakirti Joshi, Chief Economist; Dipti Deshpande, Principal Economist; and Adhish Verma, Senior Economist.

The team assessed that some of this retreat in government capex might be made up by private capex.

The report noted that a mix of revenue-enhancing measures (disinvestment and asset monetisation) and further rationalisation of revenue expenditure might be needed to reduce the capex sacrifice.

Less favourable debt dynamics in the coming fiscal vis-à-vis the past two years make the pursuit of fiscal prudence even more imperative, with just two more years to go to strike 4.5 per cent, it added.

Need for fiscal vigil

“But to meet the 4.5 per cent target,the government will have to cut fiscal deficit by 70 basis points in fiscals 2025 and 2026 each. We believe this can be challenging and will require continuous fiscal vigil,” the economists said.

They observed that the 5.9 per cent fiscal deficit target set for the coming fiscal appeared doable.

“The underlying assumptions of growth and revenue buoyancy are fairly realistic. The risk to budget math is from a gloomier-than-expected global environment hurting domestic growth via exports and messy geopolitics keeping crude and commodity prices high,” they said.

Fiscal deficit was reined in at 6.4 per cent this fiscal, as some spends during the pandemic were moderated and economic recovery, along with inflation, lifted revenue collections.