Tighter fiscal policy in works with capex outlay at 3% of GDP

Synopsis

The government plans to enhance financial discipline and align budget allocations to reduce the debt ratio by seven percentage points by FY31. The finance ministry aims to maintain core capex outlay at a minimum of 3% of GDP, adjusting based on private investments, while closely monitoring fund utilization and absorptive capacity of ministries.

New Delhi: The government is planning to further strengthen financial discipline and tailor budgetary allocations accordingly as it aims to trim the debt ratio by about seven percentage points by FY31 as announced in the budget, said people aware of the discussions.

As part of the renewed efforts, the finance ministry will seek to keep its annual core capex outlay to at least 3% of GDP on a sustainable basis. It could raise the spending further based on assessment of private investments in the economy, the people told ET.

The Centre's core budgetary capital expenditure since FY20 averaged about 2.5% of GDP, marking an improvement from earlier years. This was raised to 3.2% since FY24 in an effort to spur growth thanks to the high multiplier effect of such spending. The figure does not include grants-in-aid to states for creating their capital assets.

The people said annual budgetary allocations to various ministries and departments could now be based strictly on their "actual absorptive capacity", and not just linked to previous year's outlay. The idea is to deploy funds where they would serve the national interest better, they said.

Henceforth, fund flow, including to states for centrally sponsored schemes, and their utilisation would be monitored more closely. Fresh funds will be approved only after a substantial part of the already-released capital is utilised, the people said.

The deliberations on the next stage of financial discipline follow the announcement of a new fiscal consolidation road map from FY27. Towards this, the Centre would strive to reduce its debt to 50%-with a margin of error of plus or minus 1%-of gross domestic product (GDP) by FY31 from an estimated 57.1% in FY25.

The government is already aiming to beat its consolidation target set under the extant five-year fiscal glide path in 2021.

Finance minister Nirmala Sitharaman last month highlighted unspent funds lying with states for various programmes backed by the Centre, nudging them to utilise the money. This involves programmes such as Swachh Bharat Mission-Urban (₹12,319 crore), Samagra Shiksha (₹11,516 crore) and human resources for health and medical education (₹7,059 crore).

Under the new framework announced in the budget, the government would depart from the extant practice of targeting fiscal deficit annually to another where debt reduction will be the primary anchor of its financial management.

Under the current framework announced in 2021, the fiscal deficit was to be reduced to 4.5% of GDP by FY26 from 9.2% in the Covid year of FY21. The Centre now expects to beat the target by containing the deficit at 4.4% of GDP in FY26.