India’s Finance Minister Nirmala Sitharaman holds up a folder with the Government of India’s logo as she leaves her office to present the federal budget in the parliament, before the nation’s general election, in New Delhi, India, February 1, 2024.
| Photo Credit: REUTERS

The government under Prime Minister Narendra Modi should focus on adherence to fiscal prudence and continue on the fiscal consolidation path, suggested SBI Research ahead of the much-awaited full Budget for 2024-25 to be tabled on July 23 – the first Budget under Modi 3.0.

What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings that may be needed by the government.

SBI Research suggested that the Centre should target a fiscal deficit of 4.9%, but it must not obsess too much over the fiscal stance. The Government intends to bring the fiscal deficit below 4.5% of GDP by the financial year 2025-26.

In the Interim Budget earlier this year, the Government has targeted a fiscal deficit of 5.1% of GDP for 2024-25. However, SBI Research believes that the Government may budget a fiscal deficit of less than “5% — may be 4.9% — for 2024-25” due to stellar growth in GST revenues and higher dividends from PSUs and RBI.

State borrowings

As the budgeted fiscal deficit gets lowered, the gross market borrowing of the government will also reduce to around ₹13.5 lakh crore in FY25 compared to ₹14.1 lakh crore in the interim budget and net market borrowing to ₹11.1 lakh crore against ₹11.8 lakh crore earlier, the report, authored and led by Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said. “This along with India’s inclusion in Global Bond indices will keep the yield curve movements anchored,” it added.

In 2023-24, the Government pegged the fiscal deficit target for FY2023-24 at 5.9% of gross domestic product (GDP). Later, it was downwardly revised to 5.8%.

The interim budget, tabled on February 1, took care of the financial needs of the intervening period until a government was formed after the Lok Sabha polls, after which a full budget was supposed to be presented by the new government in July.

FM Sitharaman to break record with sixth budget presentation

With this upcoming Budget Presentation,surpassed the record set by former Prime Minister Morarji Desai, who as finance minister, presented five annual budgets and one interim budget between 1959 and 1964.

Mrs. Sitharaman’s upcoming Budget speech would be her sixth.The government on July 6 announced the dates of the Budget session of Parliament which will start on July 22 and conclude on August 12.

Mumbai:

The net financial savings of households plunged by close to 55 per cent in FY23 to 5.1 per cent of GDP, and their indebtedness more than doubled to Rs 15.6 lakh crore from FY21, primarily led by massive borrowings from banks, shows an analysis of latest official numbers.

According to SBI Research, a good portion of the drawdown from savings have gone to physical assets and of the Rs 8.2 lakh crore increase in household indebtedness in FY23, as much as Rs 7.1 lakh crore accounted for bank borrowings, primarily for home loans and other retail finances.

In FY23, household savings plunged to 5.1 per cent of GDP, from 11.5 per cent in FY21, a 50-year low, and 7.6 per cent in FY20, which was not the pandemic period.

It can be noted that the most important source of funds for the two deficit sectors — general government finances and the non-financial corporations, are household savings.

The household sector in the national accounts includes, apart from individuals, all non-government, non-corporate enterprises like farm and non-farm businesses, unincorporated establishments like sole proprietorships and partnerships and non-profit institutions.

According to Soumya Kanti Ghosh, the group chief economic adviser at the State Bank of India, financial liabilities jumped by Rs 8.2 lakh crore since the pandemic, outpacing the increase in gross financial savings of Rs 6.7 lakh crore.

On the asset side of households, there was an increase of Rs 4.1 lakh crore in insurance and provident funds and pension funds during the period.

On the liability side of the households, of the Rs 8.2 lakh crore increase, as much as Rs 7.1 lakh crore accounted for an increase in household borrowings from commercial banks.

When juxtaposed this increase in borrowings from banks with the increase in bank credit, as much as 55 per cent of the retail credit to households in the last two years have gone to housing, education and vehicle purchases.

According to Ghosh, this is possible due to the low interest rate regime, resulting in a paradigm shift of household financial savings to household physical savings in the last two years.

He sees a significant long-run relationship between housing loans and households’ savings in physical assets. As a result, the decline in net financial savings of households has resulted in a concomitant increase in household savings in gross physical assets.

In fact, savings in physical assets, which accounted for more than two-thirds of household savings in FY12, had declined to 48 per cent in FY21.

However, the trend is again shifting and the share of physical assets is expected to reach 70 per cent in FY23, due to a decline in share of financial assets.

Ghosh also believes that the shift to physical assets is also triggered by a recovery in the real estate sector and the increase in property prices.

Meanwhile, the household debt-to-GDP ratio has increased during the pandemic but has declined thereafter. ` The household debt as percentage of GDP was at 40.7 in March 2020, and has then fallen to 36.5 in June 2023.

Over the years, 80-90 per cent of household physical savings were in dwellings, other buildings and structures and rest in machinery and equipment.