Good job plugging the leaky pipeline

Fiscal deficit is likely to stay below 4.9% BE in 2024-25, and Nirmala Sitharaman is on course to meet the 4.5% medium-term target for 2025-26. That this correction is taking place as the economy slows down is an even more impressive achievement. The composition of the deficit has altered considerably to favour capex, and the current year's performance is based partly on slower project clearance in an election year. RBI is intervening heavily in the forex market to keep the rupee stable. A consequential higher dividend from RBI will help lower GoI's market borrowings in 2025-26. The extent to which the fiscal deficit undershoots in 2024-25 will make the job of meeting next year's target easier. Yet, GoI will have to squeeze expenditure in 2025-26 to make good on its medium-term objective.

Fiscal consolidation is entering an overlap zone with monetary easing, while inflation still off-target. RBI is widely expected to announce its first interest rate cut as early as next month, coinciding with GoI's deficit-reduction announcement. However, the interest rate downcycle will be shallow and fiscal adjustment is critical to inflation control, going forward. Rate-setters also cannot take their eye off food inflation, over which monetary policy has little impact. Supply-side responses to spikes in commodity prices limit the scope for fiscal correction, but GoI is right in pursuing its medium-term deficit-reduction objective.

The addressable policy objective when consumption is slowing should be the price level rather than the income level. The anticipated private investment upcycle that was to have delivered income growth is delayed. This stretches GoI's capex horizon with a supplementary impact on revenue expenditure. Expectations have been built over budget measures to revive growth, but inflation control is key to propping up real incomes.