India’s fiscal discipline is passing an early stress test

The first-quarter fiscal numbers show that despite an uncertain global environment and rising expenditure pressures, the government’s finances have held up remarkably well.

A fiscal deficit of 18.2% of the full-year target is only marginally higher than the corresponding period last year. On the face of it, that may not seem extraordinary. But viewed against the backdrop of elevated crude oil prices, geopolitical tensions and increased subsidy commitments, it reflects a fair degree of fiscal resilience.

Perhaps the most encouraging aspect of the numbers is that the government has not sacrificed capital expenditure to keep the books in order. Capital spending has reached 27.5% of the annual target, higher than a year ago. This is significant because public investment remains one of the strongest drivers of economic growth at a time when private investment is still uneven across sectors.

Protecting infrastructure spending, even during periods of fiscal stress, is a sensible policy choice.Revenue collections have also remained broadly supportive. Corporate tax and GST receipts suggest that formal economic activity continues to hold up well.

The weakness in excise collections is largely self-inflicted, resulting from the government’s decision to reduce duties on petroleum products to cushion consumers from higher fuel prices. While this comes at the cost of lower revenues, it reflects a conscious policy trade-off rather than an economic slowdown.

The concern, however, lies on the expenditure side. Fertiliser subsidies have already consumed nearly half of the annual allocation in just one quarter, underlining the impact of elevated global commodity prices.

Spending by the petroleum ministry has also risen sharply as the government absorbs part of the burden of higher energy costs.

If these pressures persist, the Budget’s expenditure assumptions could come under strain.This is where the government’s commitment to fiscal consolidation will be tested. Cutting capital expenditure would be the easiest option, but also the most damaging for long-term growth.

Expanding the fiscal deficit, on the other hand, risks unsettling bond markets and complicating the inflation outlook.Fortunately, there is still room for optimism. A stronger nominal GDP and steady tax collections could provide additional fiscal space over the coming quarters.

Higher dividends from public sector financial institutions, which are yet to be fully reflected in the numbers, should also offer some support.The first quarter, therefore, should not be read as a declaration of victory. Rather, it is evidence that the government’s fiscal strategy has withstood its first major stress test.