Apart from absence of populist announcements, the recent interim Budget also had another rare feature for an election year. It effected a sharp reduction in the Centre’s fiscal deficit target for FY25 to 5.1 per cent (of nominal GDP) from 5.8 per cent in revised estimates for FY24. This was well below market expectations of 5.3 per cent. Should this target be met, India’s fiscal gap will decline in absolute terms from ₹17.34-lakh crore in FY24 to ₹16.85-lakh crore in FY25.

This will allow a reduction in the Centre’s gross market borrowings from ₹15.43-lakh crore in FY24 to ₹14.13-lakh crore in FY25. These estimates took the bond markets by surprise and sent the benchmark 10-year government security rallying, its yield declining by a material 10 basis points, to 7.04 per cent. The decision to opt for quicker-than-expected fiscal consolidation seems wise on many counts. Despite the fiscal deficit moderating as a percentage of GDP from 9.2 per cent during Covid to 5.8 per cent in FY24, it has galloped in absolute terms. The fiscal gap used to be of the order of ₹7-lakh crore pre-Covid in FY20, but shot up to ₹17.34-lakh crore by FY24. This meant a sharp increase in the Centre’s recourse to market borrowings from ₹4.5-lakh crore in FY20 to ₹11.8-lakh crore in FY24.

Government borrowings of this order put upward pressure on market yields and escalated cost of capital for private borrowers. As the much-awaited take-off in private capex hinges on ability of banks and corporates to borrow at reasonable rates, it was prudent for the government to cut back on borrowings to cede some headroom to others. Ballooning borrowings have bloated interest payouts to ₹11.9-lakh crore, nearly a fourth of all Budget spending in FY24. With Indian government bonds set to be included in the JP Morgan GBI-EM Index from June this year and other index providers looking to follow suit, the government’s finances is likely to attract closer global scrutiny. Given the whimsicality of global investors, volatile flows can set off uncontrolled movements in domestic yields, not to speak of the rupee.

It was therefore prudent for the Centre to get its house in order before this event. Tighter-than-expected fiscal consolidation will also stand the government in good stead as it parleys with global rating agencies for a long-overdue sovereign upgrade. It is imperative for the Centre to adhere to its fiscal deficit and borrowing targets this year. While the nominal GDP growth (10.5 per cent) and tax buoyancy (1.1) assumptions in the Budget appear reasonable, the disinvestment target (₹50,000 crore) and cutbacks in subsidies, bear watching. It is to the credit of this regime that it has not treated Budget estimates as an exercise in wishful thinking.