The interim budget 2024-25 was presented today against a backdrop of steady economic growth and moderation in inflation in the Indian economy and complex geopolitical developments with global challenges of regional conflicts and war. The focus of the budget is on inclusive development and growth, social justice, farmer welfare and empowering the poor, youth and women, with an emphasis on governance, development and performance. In the areas of economic management people-centric inclusive development and proactive inflation management are important policy priorities. Recognising that infrastructure development is a key to economic growth the government has focussed on capital expenditure outlay, as this expenditure has massive multiplier impacts on economic growth and employment creation.
This fiscal policy stance faces challenges in terms of inflation management at 4 per cent
The fiscal strategy priorities for FY 2024-25 are a) focus on a more inclusive, sustainable and more resilient domestic economy, b) channelising and allocating resources towards capital spending, c) strengthening fiscal federalism by enhancing public infrastructure and d) a focus on integrated and coordinated planning and implementation of infrastructure projects. However, with the fiscal policy priority and strategy seen in conjunction with fiscal consolidation efforts one wonders whether issues relating to fiscal sustainability are adequately addressed. Fiscal sustainability is good housekeeping by the government and involves determining whether the government can continue to pursue its set of budgetary policy strategies (in the present and probable future policy settings) matching its resource ability.
Repayment of past loans are a stress factor as this increases market borrowings in gross terms and could have adverse implications on the interest rate
The key deficit indicators viz. fiscal deficit (total expenditure minus revenue receipts and non-debt capital receipts which includes disinvestment of assets and recovery of loans), revenue deficit (revenue expenditure minus revenue receipts) and primary deficit (fiscal deficit minus interest payments) relative to GDP are budgeted at 5.1 per cent, 2.0 per cent and 1.5 per cent respectively. The fiscal deficit represents the borrowings of the government and consequently the debt of the government. The revenue deficit represents the negative savings of the government administration as the government is borrowing for current consumption.
A weak fiscal consolidation questions fiscal sustainability particularly in the context of a higher revenue deficit at 2 per cent of GDP
The primary deficit represents the current operation of the government and the higher primary deficit questions the sustainability of fiscal policy. In the interest of fiscal sustainability a revenue deficit and primary deficit should be zero and as per the Fiscal Responsibility and Budget Management Act, 2003 amended subsequently in 2018 the fiscal deficit should be 3 per cent of the GDP and debt to GDP ratio should be 40 per cent of the GDP. However, in marked contrast to this fiscal deficit and debt to GDP ratio are budgeted at 5.1 per cent and 57.2 per cent, respectively. A budgeted revenue deficit of 2 per cent of the GDP is a pointer towards unsustainable economic growth as it pulls down savings of the economy and consequently investment.
The major challenge to fiscal sustainability remains visible in a relatively higher revenue deficit, the absence of a primary surplus and the threat of a vicious cycle of deficit and debt
Let us now turn to the fiscal arithmetic presented in the interim budget 2024-25. The gross tax revenue as a proportion of the GDP is budgeted at 11.69 per cent after adjusting the State share as per the recommendations of the finance commission the net tax revenue is budgeted at 7.99 per cent of GDP. The interest payment in 2024-25 budgeted at 3.63 per cent of the GDP pre-empts 32.6 per cent of revenue expenditure. This development needs to be addressed in the context of higher borrowings and higher debt level. A strong fiscal consolidation path is the need and a priority.
One welcome move in the budget is higher provisioning for capital expenditure at 3.39 per cent of GDP during 2024-25. However, a critical glance at the budget arithmetic reveals that in 2023-24 the budget estimates provided Rs. 1000961 crore but in the revised estimates it declined by Rs. 50715 crore to Rs. 950246 crore. This trend of making a higher provision in the budget and reducing it in the revised estimates is against fiscal prudence.
Fiscal deficit to GDP ratio and debt to GDP ratio should decline gradually and remain stable
A weak fiscal consolidation questions fiscal sustainability particularly in the context of a higher revenue deficit at 2 per cent of GDP. It is pertinent to note that higher revenue deficits compel the government to borrow more and thereby the debt or liability of the government increases. The higher liability of the government results in higher net liability as the assets become lower than the liabilities. For example, the net liability of the government (liabilities minus assets) stood at nearly 33 per cent of the GDP on an average during the period 2018-2022. This development questions fiscal sustainability and sooner or later government should attempt to make the revenue deficit zero.
The major challenge to fiscal sustainability remains visible in a relatively higher revenue deficit, the absence of a primary surplus and the threat of a vicious cycle of deficit and debt. In addition, there is the structural imbalance in the form of a high revenue deficit. This results in the pre-emption of borrowing for consumption expenditure thereby rendering capital asset creation for social and economic services difficult.
Against the above backdrop the government should focus on the following sustainability indicators.
i. Rate of growth in total debt should be lower than the rate of growth in nominal GDP.
ii. Real interest rate should be lower than the real GDP growth.
iii. Fiscal deficit to GDP ratio and debt to GDP ratio should decline gradually and remain stable
iv. Revenue deficits should gradually turn to revenue surplus
v. The primary deficit should gradually turn to a primary surplus
vi. Repayment of past loans are a stress factor as this increases market borrowings in gross terms and could have adverse implications on the interest rate.
vii. Creating fiscal space by enhancing fiscal empowerment (maximise revenue to the budget)
In conclusion, the interim budget 2024-25 has presented a twofold fiscal policy stand to provide a) positive impulses to the growth environment and b) to make the domestic economy more resilient to global headwinds. This fiscal policy stance faces challenges in terms of inflation management at 4 per cent under the flexible inflation targeting adopted by India.
It is important to note that the nominal GDP growth for the year 2024-25 in the budget has been projected at 10.5 per cent assuming the growth rate of 6.5 per cent in real terms as presented in the January 2024, World Economic Outlook by IMF. To manage “the final descent of inflation target to 4 per cent is a tremendous challenge for the monetary policy authorities in India”. In this context it is pertinent for India to note what the IMF says (World Economic Outlook update in January 2024) “…a renewed focus on fiscal consolidation to rebuild budgetary capacity to deal with future shocks, raise revenue for new spending priorities and curb the rise of public debt is needed.”
