ON NOVEMBER 27, Finance Minister Nirmala Sitharaman talked about the outcome of Lok Sabha elections that are likely to be held in May 2024. “Prime Minister (Narendra) Modi is coming back and coming back with a good majority,” she said in an assurance to the investor community, which prefers continuity in policies of countries where they invest. She was delivering a keynote speech at the inaugural of India Global Forum’s annual meet in Dubai.

The same day, S&P Global Ratings raised India’s gross domestic product (GDP) growth forecast for FY24 from 6% to 6.4% saying robust domestic demand is offsetting headwinds from inflation and weak exports. Quarterly GDP estimates released by Ministry of Statistics and Programme Implementation three days later supported the view — GDP rose 7.6% in July-September, much higher than all forecasts, including RBI’s 6.5%, though the bi-monthly monetary policy statement of RBI on December 8 forecast 7% GDP growth in FY24.

Promising economic indicators and the ruling party’s confidence that it will return to power amid sluggish global economy can influence interim Budget for FY25. The stronger its belief in winning next general elections, the lesser the chances of the interim Budget becoming an all out exercise to woo voters. Similarly, the stronger the economic outlook, the lesser the chances of government ignoring fiscal discipline while preparing revenue and expenditure estimates for FY25. At least that is what conventional wisdom suggests.

The interim Budget, to be presented on February 1, 2024, is likely to avoid major policy surprises that can be classified as poll promises, say experts. It could be what it is supposed to be — presentation of a Vote On Account for spending till the main Budget is presented by the new government. “It could be of interest to the extent that it provides an assessment of economy and its fiscal health,” says D.K. Srivastava, chief policy advisor, EY India.

Speaking at industry chamber CII’s Global Economic Policy Forum on December 7, the finance minister echoed this when she said the interim Budget will not have any “spectacular announcements”.

However, it would be naive to believe that it will not have any mention of the populist announcements already made by Prime Minister Narendra Modi during just concluded elections in five states. The prime minister himself said that the free food grain distribution scheme for 81.35 crore beneficiaries will be extended for five years at an expense of ₹11.8 lakh crore. There could also be enhanced allocations to other social sector schemes. What else can one expect?

The Thinking

BJP’s National Spokesperson for Economic Affairs Gopal Krishna Agarwal says three factors will drive government’s approach. One, recognition of global interest in India’s growth story that will continue for two-three decades; two, prime minister’s aspiration to make India a global leader by 2047; and three, confidence of BJP and the business community that the party under the current leadership will be re-elected, which is fuelling India’s growth. “The prime minister understands this. If India has to become a global leader, it has to be an economic power. If antyodaya (welfare) policy measures have to reach the last mile, government needs a lot of resources, for which economic growth is important. Whether you want to generate employment, create infrastructure or trigger manufacturing growth, economic growth is a prerequisite.” So, focus of the interim Budget will be on strengthening macroeconomic parameters, continuing welfare schemes in a targeted manner and increasing direct and indirect tax collections through formalisation of economy and plugging loopholes and leakages, he says. “For attracting global investors and managing inflation, a clear fiscal deficit roadmap is very important,” he says.

Fiscal Balance

To its credit, apart from Budget during the Covid crisis, the BJP government has been mindful of the need to maintain fiscal balance. Presenting the FY24 Budget in February 2023, the finance minister reiterated government’s post Covid fiscal roadmap — steady decline in fiscal deficit to below 4.5% by FY26. The deficit had touched 9.5% of GDP in FY21 due to Covid. It came down to 6.9% in FY22 and 6.4% in FY23. It is estimated to be 5.9% this year (FY24). “We have adhered to this path and I reiterate my intention to bring fiscal deficit below 4.5% of GDP by FY26,” she said in her 2023 Budget speech. EY’s Srivastava says if government is serious about the FY26 target, it will aim for 5.2% in FY25. “Medium-term glide path should pass through the 4.5% target in FY26 and spell out annual reduction targets to achieve the norm of 3% of GDP latest by FY28,” he says.

Will the interim Budget be aligned with these targets? Or, will there be slippage in FY24 due to rise in global crude oil prices and resultant increase in fertiliser and petroleum subsidies? Will increase in food grain prices, extension of free food grain scheme or higher allocation for income support to farmers impact the fiscal deficit target? “Unlikely,” says N.R. Bhanumurthy, vice chancellor, Dr. B R Ambedkar School of Economics University, Bengaluru. Pick-up in revenue will be more than sufficient to balance any increase in expenditure, he says. “If you look at recent statement of RBI, they say there could be some upside surprises (in GDP growth in FY24). Global economy was bad three-four months back. Now, advanced countries are not going down as much as projected. Global conditions have improved and that’s why RBI is a little more optimistic than in the past. More importantly, whatever El-Nino effect many had projected, has not been that severe till now. So, global conditions, rainfall conditions, seem better. There could be upside surprises in GDP growth this year,” he says.

Image : Photograph by Sanjay Rawat

Robust growth will also mean higher tax and non-tax revenues. “We may end up on the higher side on revenues. I don’t think either government or RBI or any other agency has projected such robust non-tax revenue growth. From RBI to PSU dividends, everything has been higher than Budget projections. We will be slightly off-track on disinvestment but the rest will more than offset that. Similarly, none of the recent announcements (free food grain distribution, etc) will have any implication in FY24. I don’t think they will slip on fiscal deficit,” says Bhanumurthy. Fiscal deficit rose to ₹8 lakh crore or 45% of the FY24 Budget Estimate (BE) in April-October FY24 from ₹7.6 lakh crore in April-October FY23. Net tax revenues rose 11.2% and non-tax revenues 48.7% on the back of RBI dividend amid 6.5% growth in revenue expenditure and a significant 33.7% rise in capital expenditure. “Our baseline expectation is that direct taxes will surpass FY24 BE by ₹85,000 crore, a portion of which will be absorbed by lower-than-budgeted Union excise duty collections, leaving a gross upside of around ₹50,000 crore. Setting aside additional devolution to states, we estimate that net tax revenues will exceed FY24 BE by a modest ₹30,000 crore. However, this will be offset by a shortfall in disinvestment proceeds,” says Aditi Nayar, chief economist and head of Research and Outreach, ICRA Ltd.

According to Nayar, after considering the cost of free food grain under National Food Security Act for January-March 2024, higher LPG and nutrient-based subsidies on P&K fertilisers for ongoing rabi season and additional amount likely to be required for MGNREGS, spending is likely to exceed FY24 BE by ₹8,000 to ₹1 lakh crore. “However, this sum could be matched by expenditure savings which have ranged between ₹1.1 and ₹2.3 lakh crore in recent years. As a result, we foresee low risk of the 5.9% fiscal deficit target being breached,” she says.

Image : Photograph by Fortune India

Interim Budget

Once the macro level fiscal question is answered, one needs to look at the Budget at a granular level. “Our target is to grow economy, curb leakages in tax collections, end leakages in welfare schemes using more technology and focus on sectors where India has strong potential for growth. Two key sectors where we need additional focus are knowledge economy and cultural economy, in addition to potential growth drivers like manufacturing, start-ups and aerospace,” says BJP’s Agarwal. In other words, don’t be surprised to see emphasis on sunrise technology sectors such as green mobility, 5G, electronics and chip manufacturing.

Similarly, taking cue from cultural branding that took centre stage during India’s G20 Presidency, one can expect the interim Budget to focus on creating world-class infrastructure in and around cultural and religious centres; this could cover cleanliness missions, roads and hotels. “India had a strong culture of art, festival, music, food, architecture, tourism. All these have great potential to propel India’s economic growth,” says Agarwal.

In fact, both interim and full budgets, if presented by the incumbent government, will follow the template of recent budgets. For instance, FY24 Budget initiated a vision for Amrit Kaal (next two-and-a-half decades), an empowered and inclusive economy. The priorities of previous budgets — inclusive development, reaching last mile, infrastructure, investment, ease of doing business and ease of living through futuristic initiatives — should find a place in forthcoming Budget, too. “The targets for Amrit Kaal are the same. But nothing is static. So, production linked incentives will continue, but sectors may differ. Even in atmanirbhar package post Covid, our approach was staggered, as different allocations were given at different points in time to help the economy,” says Agarwal.

The Challenge

Even in best of times, it is difficult to make predictions about Union Budget one or two months in advance. For one, India is not insulated from internal and external challenges. One major issue that could change budgetary priorities is inflation. “The biggest risk for economy anywhere is inflation. Some steps are required to tackle inflation. The full Budget will come four-five months after the interim Budget. In a fast evolving economic scenario, not taking a step for five months is dangerous,” says Devendra Kumar Pant, chief economist, India Ratings.

One cannot say that there is no inflation risk, he says. “Consumption and investment demand are improving but are not back on track. In investment, demand is driven by government. Can a government with Budget constraints and high deficit and debt pump-prime the economy endlessly? No. Why will someone invest? They will invest when there is stability in demand. Low interest rate regime is a necessary but not a sufficient condition. If demand growth is strong, investment takes place even with high interest rates. So, the first thing to be tackled, if you are looking at real interest rate, is inflation, a prerequisite for even monetary easing. Perhaps when government announces interim Budget and Monetary Policy Committee is confident inflation will come down structurally, repo rate movement will start,” he says. Pant says government could take steps to encourage consumption at the bottom of the pyramid. “Can there be relief to these people so that their real income goes up? Here, again, inflation is at play. Interim Budget may look at this,” he adds.

BJP’s Agarwal says government is aware of challenges which are not allowing India to grow to potential. The need to pursue reforms to help the country utilise its growth potential will be considered, he says. These announcements, however, will be aspirational as new government will be able to frame laws only after the elections. “Economic growth and potential to grow are not the same. The narrative that India will be on growth path irrespective of supportive government action is not correct. You need to continuously walk on the reform path. Revdi (freebie) culture is a challenge. Labour and agriculture reforms are required. The government will have to show willpower and spend a lot of political capital on these issues. The prime minister is willing to take risks,” says Agarwal.

Image : Photograph by Sanjay Rawat

To Conclude

On December 3, BJP registered massive victories in majority of states where elections were held the previous month. The fact that its campaigns in Madhya Pradesh, Rajasthan and Chhattisgarh were led by the prime minister and his Central leadership shows their popularity among voters of these states.

A vote of confidence to the ruling party months before general elections reduces electoral compulsions of the Budget making exercise. A shift to old pension scheme — a major promise made by Opposition parties during the recent state elections — could now be ignored, though the Budget could announce some changes to New Pension Scheme to make it more appealing to the voter without draining central exchequer in a big way.

There can’t be a vanilla Budget in an election year. That’s certain.

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