6 min readFeb 1, 2024 09:21 AM IST
First published on: Jan 31, 2024 at 08:10 AM IST
The Union Budget, which will be presented tomorrow, will seek to balance three priorities. One, ensuring a sharper-than-usual fiscal consolidation. Two, focusing on welfare expenditures in the run-up to the general elections, and three, maintaining the thrust on capital expenditure to improve physical infrastructure. Interim budgets are expected to be devoid of big bang announcements. But if the 2018-19 interim budget is a guide, a few prominent welfare expenditures should be expected. We expect some targeted expenditure on rural India, youth and women welfare, and MSMEs. On the other hand, capital expenditure growth, though much lower than last three-four years, will still be adequately high next year (2024-25). All of these priorities should be enveloped in a fiscal consolidation push which possibly pegs the fiscal deficit to GDP ratio at (or below) 5.4 per cent.
The government has targeted a fiscal deficit of below 4.5 per cent by 2025-26 in the 2021-22 Union budget speech. The target explicitly has not changed. At 5.9 per cent in 2023-24, the deficit needs to be reduced by 1.4 percentage points over 2025-26 — that’s a pretty tall task. In fact, given the expansionary fiscal policies globally, it might be tempting to place the fiscal consolidation on the back burner. One may also argue that given the relatively weak consumption growth, the government should keep the fiscal taps open for longer. However, India’s fiscal metrics remain adverse when compared with other major economies. The inclusion of Indian government securities in global bond indices puts the fiscal under greater scrutiny. To that end, sticking to targets will be important.
While debt sustainability is not a concern, controlling debt/deficit would help restrict interest payments and borrowings. Borrowings for the Centre have doubled compared to pre-Covid levels. In the 2024-25 budget, the government will likely announce around Rs 15.8 trillion of gross borrowing. This will be in line with this year’s gross borrowing, but a large jump from around Rs 5.7 trillion in 2018-19. Further, the Centre’s interest payments have increased to around 40 per cent as a proportion of total receipts from around 35 per cent pre-Covid. Its debt/GDP, currently around 56-57 per cent, is unlikely to go back to the pre-Covid level of around 45 per cent, even by the end of this decade. If GDP growth continues at the present pace, these risks will remain under the radar, but it becomes all the more important to exercise fiscal rectitude when the conditions are favourable.
The good part of the Centre’s fiscal situation has been the buoyancy in direct tax revenues (likely around 1.9 per cent this year) riding on better compliance and robust profit growth of the companies. Even if tax buoyancy were to normalise to around 1.5 next year, it would represent a growth of around 17 per cent. This would assist in the fiscal consolidation job. However, with corporate earnings growth expected to slow down to around 11 per cent and formal jobs also on a weaker footing, direct taxes buoyancy may be lower next year.
The fiscal deficit was at 4.6 per cent in 2019-20. Thus, essentially, the path back to 4.5 per cent by 2025-26, is a reversal to 2019-20 levels. How do the broad heads stack up in this scenario?
Total expenditure has increased to 15.3 per cent of GDP this year, up from 13.4 per cent in 2019-20 with revenue expenditure broadly flat at around 12 per cent while capital expenditure has increased to 3.3 per cent this year, up from 1.7 per cent in 2019-20. Over the same period, total receipts have increased to 9.4 per cent, up from 8.7 per cent. Thus, for reverting back to 4.5 per cent deficit levels, while maintaining capital expenditure at current levels, the revenue expenditure (as a proportion of GDP) has to reduce sharply. This implies that over the medium term, assuming a moderate tax buoyancy, revenue expenditure has to grow at a pace much lower than nominal GDP growth and capital expenditure growth can only be moderately above the nominal GDP growth.
Over the past four quarters, consumption has been on a weak footing, averaging at a growth of 3.5 per cent. Investments, on the other hand, driven by government spending, have averaged at 9 per cent and been the main driver for GDP growth. In that context, the budget could seek space for welfare spending to counter some of the general weakness. The rural and agriculture sector could see some support given that some of the trade restrictions on key crops may have impacted farmers’ potential incomes. The youth, women welfare, and MSMEs could be the other focus areas. However, revenue expenditure growth (including interest payment, salaries and pension, welfare schemes, transfers to states) can at best be in low single digits (around 3 per cent). This forms the constraint for meaningful populist expenditure.
Over the past three to four years, the government has done a commendable job in improving the quality of expenditure. The policy outline of pushing the supply side through capital expenditure has worked well in terms of maintaining macro-stability even as the fiscal deficit expanded. The budgeting exercise will start feeling the pressure on continuing with the pace of capital expenditure seen over the past few years. In this year’s budget, capital expenditure growth could slow down. This would leave space for decently high spending growth in the sectors that matter for the overall development of the country — defence, housing, railways, and roads.
The writer is chief economist at Kotak Institutional Equities. Views expressed are personal
The government has targeted a fiscal deficit of below 4.5 per cent by 2025-26 in the 2021-22 Union budget speech. (Express File Photo)
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