Despite subsidies, Budget maths sticks as Sitharaman enters home stretch

A crucial decision government has to take is whether to stick to the FY23 expenditure level or top it this year

After state election results, Finance Minister Nirmala Sitharaman will have to figure out what her expenditure scorecard should look like in Financial Year 2023-24 (FY24.) She would wish to emphasise on priorities post the Lok Sabha elections in FY25, but it is now that the management of the central government purse shall attract attention in India and abroad.

Note that India government papers shall be part of the global bond indices soon. J P Morgan has announced that Indian bonds will be included in its Government Bond Index-Emerging Markets suite starting June 2024. Fund managers like J P Morgan will keenly watch how well Sitharaman manages to stick close to her budget promises, getting a sense of how the government will do so in future. Consistency matters for investors. The numbers could be substantial, though. The total demand from foreign banks, investors, and index-related flows “would account for more than 90 per cent of the net supply (of government papers) in 2024-25. Hence demand for government securities could exceed supply by Rs 90,000 crore next year," said Gaura Sen Gupta, India economist at IDFC First Bank, in a note.

For the domestic market, including small and medium enterprises, the government’s fiscal management is equally important. Good fiscal management eases pressure on the inflation rate. To that extent, it helps the Reserve Bank of India (RBI) to begin to consider a cut in the benchmark repo rates of interest. “We expect the RBI to start cutting rates in Q2 2024. We believe that the conditions for it to do so will be met by then, including well-anchored inflation expectations,” wrote Alexandra Hermann, lead economist at Oxford Economics, in a note this week. How those rates move matter for the poor, since any hardening of rates would hurt them the most.

Focus will also be on whether she keeps revenue expenditure to a growth rate of just 1.4 per cent, as she promised in February in her Budget at just above Rs 35 trillion. She has promised capital expenditure rise at 36 per cent and net tax collections at 11 per cent run rate in FY24.

Usually, a measure of stress in government finance is available in supplementary demand for grants the Finance Ministry places in Parliament sessions spread through the year. Breaking conventions, the Ministry this year compiled the first batch of these grants for the Winter Session beginning December 4. It skipped the Monsoon Session, confident that the numbers from the Budget will hold.

Stress in government numbers usually emerges in the revenue expenditure budget, so it would be useful to unpack those first. Budget documents list 110 “major heads” of expenditure (the largest ones are listed in this table).

Sitharaman’s biggest concern is subsidies rising for food (including PM Garib Kalyan Anna Yojana) and fertilisers and expenditure for rural development (MGNREGA) and PM Kisan. The four items account for almost 15 per cent of the total revenue expenditure.

Other major expenditure items are health care, labour, and special area programmes like those for Northeast India. The Ministry has compressed the Budget estimates for energy, transport and housing by 39 per cent, 47 per cent and 61 per cent year-on-year, to keep revenue expenditure within limits. The expenditure on the three sectors was little less than Rs 90,000 crore in FY23 and they were given half that amount in FY24.

Free food grains subsidy

The Pradhan Mantri Gareeb Kalyan Anna Yojana, the free food grains scheme, will cost Rs 11.80 trillion to feed more than 800 million people for five more years from 2024. It would mean an annual expenditure of about Rs 2.4 trillion, assuming a monthly expenditure of nearly Rs 20,000 crore on a pro rata basis. The scheme was to run till the end of this year, having run through successive extensions.

The additional subsidy burden for the last three months of FY24 is expected to be close to Rs 6,000 crore. This is because the Centre has a head room in the food subsidy budget this year. It has spent Rs 95,000 crore in the first half of FY24, or about 48 per cent of the budgeted food subsidy of nearly Rs 1.97 trillion for the entire year. In the same period in FY23, actual spending accounted for 56 per cent of the budgeted expenditure. Assuming the same run rate of Rs 20,000 crore per month, the balance in the budgeted food subsidy would last for more than five months starting from October.

So the final excess requirement on food subsidy over the Budget Estimates could be less than Rs 20,000 crore for FY24.

Fertiliser subsidy

Instead, in FY24, the elephant in the room is fertiliser subsidy. The non-urea fertiliser subsidy is estimated to be around Rs 60,000 crore in FY24, accounting for global price hikes. This is around 36 per cent more than the budget estimates.

Fertiliser subsidy was estimated at Rs 1.75 trillion, of which urea subsidy was estimated at around Rs 1.31 trillion, while the non-urea fertilizer was estimated at Rs 44,000 crore.

In the first half of FY24, around 96 per cent of the non-urea fertiliser subsidy and 56 per cent of urea subsidy has already been spent. While petroleum subsidy could increase by Rs 10,000 crore over the budgeted amount of Rs 2,257 crore due to subsidised cooking gas cylinders for domestic use, the government expects to find matching savings to make up for this.

MGNREGA impact

Robust demand for MGNREGA continues in FY24 despite economic activity picking up and the Centre plans to give more funds for the scheme.

As per data on the MGNREGS website, expenditure on the scheme has been Rs 77,634 crore till the end of October. The total available funds are around Rs 68,014 crore, reflecting a shortfall of around Rs 9,619.53 crore. In her Budget, the Finance Minister had allocated Rs 60,000 crore for the scheme.

To make up for the deficit, the Finance Ministry has released an additional Rs 10,000 crore, ahead of the supplementary demand for grants, to be tabled in Parliament in this winter session. Before the financial year is out another Rs 20,000 crore might become necessary, bringing the total close to FY23 expenditure.

The math is as follows: The average cost per person per day as per the MGNREGS website in FY24 is Rs 321. This means to meet the projected person-days of work (117.84 X 321), a sum of around Rs 37,826.6 crore will be required. The MGNREGA gives a legal right to a minimum 100 days of average employment in rural India.

Revenue math

The Centre’s net tax collections grew at a healthy rate of 14.7 per cent – higher than the Budget’s annual target of 11 per cent – in the first half of FY24 but then slipped. Even in the first six months, the weakest performance was in excise duties, which have seen year-on-year negative growth of 10.8 per cent. At the end of seven months, the Centre’s net tax receipts were at 55.9 per cent of the Budget estimate and short of last year at the same point. It means there is not much space for scaling up tax receipts. This includes the pace of Goods and Services Tax (GST) receipts. GST collections for the eight months ending November 2023 were Rs 13.32 trillion bringing up the average for the year to Rs 1.66 trillion, nearly 11.9 per cent higher than that for FY23.

However, Aditi Nayyar, Chief Economist, Head Research and Outreach, ICRA Ltd still expects direct tax receipts will surpass the FY24 target by Rs 85,000 crore. “Setting aside the additional devolution to the states, we estimate that net tax revenues will exceed the FY2024 budget estimates by a modest Rs 30,000 crore”.

Fiscal balance

At the end of the first half of the year, the gross revenue expenditure in the first half of the current fiscal year was higher by 10 per cent compared to the same period a year ago. Most of this stress revolves around the cumulative higher subsidy bills, of about Rs 50,000 crore. The finance minister had projected a barely perceptible 1.4 per cent rise for aggregate revenue expenditure in FY24. This is likely to be surpassed.

The slippages, as of now, in other big-ticket items do not seem to be substantial going by the data of the Controller General of Accounts. At the end of October, as per those data the outlays on medical health, outlay on labour, special area programmes like those for North East, have not percolated to higher spending beyond the budgeted estimates. The outlier is water and sanitation and defence.

A different way to measure the stress is a peak at the Direct Benefit Transfer window, since a lot of support goes through it (which also includes MGNREGA, PDS and PMAYG). All the ministries had been advised early this year to front load these payouts in the first half of the year. Till the end of October, FY24 a sum of Rs 3.28 trillion as handouts have gone to the recipients. For comparison, in FY23, the sum for the full year was Rs 6.67 trillion (Rs 2.1 trillion as cash and Rs 4.6 in kind). So at the end of seven months this year, the payout was 50 per cent as of last year.

A crucial decision the Narendra Modi government will need to take is whether to stick to fiscal target of FY23 or top it this year. The Finance Ministry’s borrowing plan for the second half of FY24 shows it does not plan to exceed the fiscal deficit target of 5.9 per cent of the gross domestic product. Other government departments will have to cut expenditure to keep to this promise.