India has managed to contain its fiscal deficit at 4% of its gross domestic product (GDP) bettering its target of 4.1% of GDP, the finance ministry said on Sunday.
A lower fiscal deficit — an indicator of how much the government borrows to fund its expenses — will likely bring India closer to an upgrade of its sovereign ratings by global agencies.
Last month, ratings agency Moody’s Investor Services raised India’s credit outlook to “positive” from “stable”, saying that recent measures have raised prospects for growth and fiscal management in an apparent endorsement of the Narendra Modi-led government’s reformist moves.
Another agency, Fitch Ratings, echoed similar opinion, praising the government reforms agenda for bringing “dynamism back”.
Fiscal deficit stood at Rs 5,01,880 crore at the end of 2014-15, 98% of the revised budget estimates. As a proportion of GDP, it stood at 4% against 4.4% in 2013-14.
The finance ministry said that “prudent policies and commitment to fiscal consolidation” has enabled the government to contain the fiscal deficit.
“The Union government is firmly committed to path of fiscal consolidation and this is a step forward,” the statement added.
The revenue deficit in 2014-15 stood 2.8%, beating the budget target of 2.9% for the last fiscal.
Gross tax collections during the year grew by 9% in 2014-15 and stood at Rs 12,45,037 crore.
The fiscal deficit target of 4.1% of GDP for 2014-15 was set by former finance minister P Chidambaram in the UPA government’s interim budget.
Finance minister Arun Jaitley has said he was taking it as a “challenge” to meet this ambitious and “daunting target” set up by his predecessor.
In his first full budget in February, Jaitley had laid down a medium-term fiscal consolidation roadmap, targeting to bring it down to 3.9% of GDP in 2015-16, and to 3% by 2017-18.
A lower fiscal deficit will give more money to the government to spend on development projects and welfare schemes. It is also vital to increase household savings and making more, and eventually cheaper, funds available for the private sector and push investments.
A high fiscal deficit can “crowd out” private sector from the credit market by shrinking the banks’ pool of lendable resources to industry and households.
The latest figures are a major turnaround from about two years ago when threat of a sovereign downgrade was looming large given the precarious state of public finances
In contrast, Moody’s last month had hinted at the possibility of an upgrade of India’s sovereign rating, a measure of a country’s credit-worthiness that influence investment decisions, over the coming months if the pace of reforms picked up.