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Budget: Aided by RBI surplus transfer, FM improves fiscal consolidation

Capital expenditure remained unchanged, even as Sitharaman announced viability gap funding and a market-based financing framework for infrastructure

Finance Minister Nirmala Sitharaman expedited fiscal consolidation, projecting it at 4.9 per cent of gross domestic product (GDP) for 2024-25, down from the Interim Budget estimate of 5.1 per cent. This was despite an increased spending on employment
Illustration: Binay Sinha
Indivjal Dhasmana New Delhi
4 min read Last Updated : Jul 23 2024 | 11:31 PM IST
Finance Minister Nirmala Sitharaman expedited fiscal consolidation, projecting it at 4.9 per cent of gross domestic product (GDP) for 2024-25, down from the Interim Budget estimate of 5.1 per cent. This was despite an increased spending on employment generation schemes, financial packages for Bihar and Andhra Pradesh, and relief under the new personal income tax regime.

Sitharaman also committed to reducing the Centre’s fiscal deficit below 4.5 per cent of GDP in FY26 and further lowering it so that the debt would decline in proportion to GDP.  This may help the Centre and the states to control their fiscsal deficit at below 7 per cent structurally, which may prompt a sovereign rating upgrade by Standard and Poor’s from the current lowest investment grade. The states’ fiscal deficit limit stands at 3.5-4 per cent of their respective gross state domestic product (GSDP). 

The minister was able to project a lower fiscal deficit for FY25, compared to the Interim Budget, because of a record surplus transfer from the Reserve Bank of India (RBI) of Rs 1.09 trillion and dividends from public-sector banks, such as State Bank of India, Canara Bank, Indian Bank, Bank of India, and EXIM Bank, totalling Rs 13,440 crore.

This helped the government project a non-tax revenue (NTR) kitty higher by Rs 1.5 trillion for FY25 than what was pegged by the Interim Budget.

This was much higher than Rs 20,000 crore less revenue that the FM projected from taxes, post-devolution to the states, for the current financial year vis-a-vis the pre-general election Budget. 

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Booming NTR also helped the government raise its revenue expenditures by Rs 60,000 crore for FY25 against Interim Budget estimates by launching various employment-linked schemes and financial assistance to Bihar, Andhra Pradesh, and a few other states.

Capital expenditure remained unchanged, even as Sitharaman announced viability gap funding and a market-based financing framework for infrastructure. Despite increased revenue expenditure, the revenue deficit is projected to fall to 1.8 per cent of GDP for FY25 from the Interim Budget’s 2 per cent.

Both fiscal and revenue deficits are projected to fall compared to the Interim Budget, despite nominal GDP growth pegged at 10.5 per cent for FY25. Nominal GDP is projected at Rs 326.4 trillion for FY25, lower than the Interim Budget estimate of Rs 327.7 trillion.

Sitharaman initially projected the fiscal deficit at 5.9 per cent of GDP for FY24, revised it to 5.8 per cent, and further improved it to 5.6 per cent.

The Centre’s debt was also revised down to 56.8 per cent of GDP for FY25 from 57.2 per cent in the Interim Budget. It has been over 60 per cent for three years each since Covid-hit FY21.

However, there are critics of the government’s "overemphasis" on fiscal consolidation even as the finance ministry itself talked against  fixation to reducing fiscal deficit to three per cent as enshrined in the original fiscal responsibility and budget management (FRBM) Act.  For instance, Anil K Sood, co-founder of The Institute for Advanced Studies in Complex Choices, said fiscal consolidation was here to stay even though it was the least appropriate policy choice given the state of the economy.

“The government seems committed to fiscal consolidation as revenue expenditure was only increasing by 6.2 per cent year-on-year in FY25, while tax revenue is expected to rise by 11 per cent,” Sood said, adding that the government seems content with low real GDP growth (6.5-7 per cent) and nominal GDP growth (10.5 per cent), without aiming to accelerate these rates. 

Ranen Banerjee, partner at PwC India, said fiscal prudence is the highlight of the Budget. The government has gone with realistic projections on its revenue and expenditure estimates and refrained from announcing populist measures. 

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Topics :Average monthly surplusRBI

First Published: Jul 23 2024 | 5:45 PM IST

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