India’s fiscal outlook has become more challenging as nominal GDP growth is projected to slow to 9.7 per cent in the fiscal year 2024-25, significantly below the 10.5 per cent forecast by finance minister Nirmala Sitharaman in the Union Budget of July.

As a result, the nominal GDP base, the foundation for all budget calculations, is expected to fall short by approximately ₹2.26 lakh crore, totalling ₹324.11 lakh crore instead of the ₹326.37 lakh crore projected earlier.

This downward revision in nominal GDP is expected to have important implications for the fiscal deficit. The slower-than-expected growth could push the fiscal deficit to 5 per cent of GDP, breaching the government’s target of 4.9 per cent.

While the government had aimed to cap its deficit at ₹16.1 lakh crore, the revised GDP estimates suggest that the deficit, as a percentage of GDP, would increase to 5 per cent unless corrective measures are taken.

However, analysts are cautiously optimistic that the fiscal deficit may still be kept in check, with the government likely to reduce capital expenditure to offset the shortfall in GDP growth. Data for the April-November period already indicated a 12 per cent year-on-year decline in capital spending, pointing to fiscal prudence ahead of the 2024 general elections.

“The fiscal deficit at the end of November 2024 stood at ₹8.5 lakh crore, or 52.5 per cent of the Budget Estimate (BE). With the revised GDP figures, if tax receipts grow as per the BE and the government reduces expenditure due to lower capital spending, the fiscal deficit could be kept at 4.9 per cent of GDP for FY25,” said Soumya Kanti Ghosh, group chief economic adviser at SBI, in a report.

While the fiscal deficit target may remain broadly intact due to tight capital expenditure control, the shortfall in nominal GDP poses a significant challenge.

Aditi Nayar, chief economist at Icra, noted that the fiscal deficit ratio may stay close to the budget estimate due to reduced capital expenditure and a focus on revenue buoyancy. “The government will likely contain the deficit through efficient revenue collection and reduced spending, especially in capital expenditure,” Nayar added.

The lower nominal GDP also has a direct impact on gross tax revenue (GTR), which is tied to the overall economic activity.