Nirmala Sitharaman's dilemma: Maintaining fiscal stability in the face of global headwinds, 2024 general election

The role of the Finance Minister Nirmala Sitharaman is a very critical one, especially when it comes to fiscal management at a time when the general election is just over a year away. Will she be able to adhere to the challenge of maintaining the fiscal consolidation path by pegging the fiscal deficit of 5.75 per cent to 6.0 per cent of the GDP in 2023-24? Looks quite challenging. 

The government has set an ambitious goal to reduce the fiscal deficit to 4.5 per cent of GDP by 2025-26, which requires a reduction of at least 60-65 basis points in each of the next three fiscal years. 

In fact, the size of the Union Budget jumped by 35 per cent from 26.86 lakh crore in 2019-20 to Rs 35.10 lakh crore by widening the fiscal deficit and borrowing heavily from the market because of pandemic shocks. The Russia-Ukraine war last year increased the subsidy bill for food and fertiliser. The budget size should now normalise as the government has to follow its own set fiscal consolidation glide path.

A recent report by Pranjul Bhandari, the chief economist at HSBC India, highlights the significant challenge faced by the Finance Minister. According to the report, nearly half of the centre's net tax revenues are spent on servicing government debt, leaving limited resources for critical sectors such as education, healthcare, and defence. 

A lower fiscal deficit not only helps contain inflation but also promotes sustainable economic growth. 

However, the Finance Minister's job is made even more challenging by the expected fall in nominal growth in 2023-24 to around 6 per cent due to a likely global recession. This will impact the gross revenue collection and also limit the room for aggressive spending on capital expenditures or social sector initiatives. She has to strike a balance at a time when the private capex is not showing any signs of picking up. 

Despite this, some experts believe that the reduction in subsidies may provide some breathing room for the government. In fact, the subsidy bill has risen in the last 2-3 years. 

Currently, the Finance Responsibility and Budget Management (FRBM) Act mandates the central government to maintain a fiscal deficit limit of 3.0 per cent of GDP, but due to the pandemic and the subsequent stimulus measures, the fiscal deficit jumped from 3.5 per cent to 9.5 per cent of GDP in 2020-21. 

The government is committed to bringing the fiscal deficit down to 3 per cent in the medium term. Meanwhile, the states are in a better position as they have budgeted a fiscal deficit of 3.4 per cent 2022-23.  

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