The Centre is expected to stick to its path of fiscal consolidation in the forthcoming Union budget and has enough room to lower the fiscal deficit target of 5.1 per cent of GDP set in the interim budget, according to sources in the government.

Sources suggest a marginal decrease in the deficit, likely keeping the target close to 5 per cent.

Discussions are on to balance increased allocations to certain programmes and sectors with maintaining fiscal prudence, the sources said.

The higher-than-budgeted dividend of ₹2.11 lakh crore from the Reserve Bank of India (RBI) has given North Block the confidence to achieve fiscal discipline.

Besides, tax collections have been strong in the first two months of the fiscal and are expected to remain so on the back of a healthy economic outlook.

“The budget will likely involve some adjustments, including raising allocations for specific sectors and potentially introducing minor tax changes.

“These are under discussion and not yet finalised. However, the government will ensure the fiscal deficit target is either maintained or further reduced,” sources revealed.

The government’s recent performance bolsters optimism: May in fact saw a significant fiscal surplus exceeding ₹1.6 trillion, while revenue surplus was ₹2 trillion.

The improvement can be attributed to factors such as a higher-than-anticipated surplus transfer from the RBI, robust tax revenues and compressed capital expenditure compared with the interim budget projections.

Finance ministry sources indicated North Block will adhere to the fiscal deficit target of 5.1 per cent of GDP. They also reaffirmed the glide path of the deficit to 4.5 per cent of GDP in the following fiscal year.

The path may not be without challenges: the Modi government faces pressure from coalition partners seeking state-specific packages and from within the party to address the vulnerable sections of society.

Analysts see room for a lower deficit target in the current year: Icra chief economist Aditi Nayar expects a potential upside of ₹1.2 trillion in tax and non-tax receipts compared with the interim budget estimates. This surplus could be split between increased spending and reducing the fiscal deficit to below 5.1 per cent of GDP.

D.K. Srivastava, chief policy advisor at EY India, suggests the government will prioritise capital expenditure, while remaining committed to fiscal consolidation by bringing the deficit closer to 5 per cent in FY25.

The final deficit target for FY24-25 will be clarified in the upcoming Union budget. While analysts see a chance for a lower target, the exact figure remains under discussion.

Despite the challenging fiscal consolidation path, India Ratings and Research believes the government has consistently achieved better-than-budgeted deficit ratios in recent years.

They project the full budget to further lower the deficit-to-GDP ratio to 4.9
per cent compared with the interim budget’s 5.1 per cent target.

Motilal Oswal expects the government to maintain its fiscal consolidation path while improving the quality of spending.

The brokerage expects higher spending due to increased revenue from RBI dividend, with a portion potentially used to reduce the deficit to around 5 per cent of GDP.