The sanctity of an interim Budget

The Finance Minister's bold announcement of no big schemes on February 1 is commendable

Last week, Finance Minister Nirmala Sitharaman made a bold and prudent statement that should set her apart from many of her predecessors, particularly those in the past couple of decades. Addressing industry leaders, the finance minister virtually poured cold water on all their expectations of major announcements in the upcoming Budget.

“I am not going to play spoilsport, but it is a matter of truth that the February 1, 2024 Budget…will just be a vote on account because we will be in election mode, and elections will happen during the coming summer,” she said. Elaborating further, the finance minister explained: “So, the Budget will just be to meet the expenditure till a new government comes. So, no spectacular announcements are made at that time.”

To understand the significance of what the finance minister said, it will be necessary to contextualise her statement. Remember that she was addressing an audience of industry leaders just about a month and a half before she would present the interim Budget for 2024-25. Industry is usually keen to get an indication from the finance minister about what the government plans to unveil in a Budget. Last week, instead of providing a hint, Ms Sitharaman said categorically that industry should not expect any major announcement in the Budget.

Even though industry appeared to be disappointed, the finance minister deserves praise not just for her candour, but also for promising to uphold a convention that a few of her predecessors did not honour. An interim Budget is a vote-on-account statement, presented before a general election, allowing the government to carry on with its expenditure until a new government is formed and a full Budget is presented. Also, a government is elected for five years and, therefore, it should present no more than five full Budgets during its tenure. The government that was elected in 2019 has already presented five full Budgets — the fifth Budget being the one for 2023-24. So, why should there be any announcements in an interim Budget, making it almost the sixth Budget in a five-year term? Ms Sitharaman has both logic and convention by her side.

Yet, few finance ministers in the last couple of decades have followed this convention. Of the four interim Budgets presented since 2000, at least three decided to ignore the convention of refraining from making big announcements of schemes or taxation measures. The interim Budget of 2009 had stuck to the tradition that Ms Sitharaman had referred to in her address to industry last week. But the interim Budgets of 2004 and 2014 deviated from that convention and proposed minor taxation changes.

A bigger deviation took place in the interim Budget of 2019, which announced the Pradhan Mantri Kisan Samman Nidhi, an income support scheme for farmers, entailing an annual outlay of Rs 75,000 crore for 2019-20. In addition, it gave the benefit of tax rebate to all individual taxpayers with an annual income of up to Rs 5 lakh. The interim Budget of 2019 made another departure. Unlike the previous interim Budgets, it had a Part B of the finance minister’s speech, which is usually reserved only for full Budgets containing taxation proposals.

If Ms Sitharaman follows what she told industry leaders last week, it would be safe to assume that the interim Budget for 2024-25 would make no big-bang announcements on new schemes or any taxation initiatives like concessions. Presumably, there would also be no Part B of the speech, which would rightly restore a convention that most finance ministers have followed sincerely.

There is, however, a question. If the Budget makes no big announcements on new schemes, projects, or tax giveaways, the government would face a major political dilemma as it may have to reluctantly consider shunning the practice of unveiling pre-election sops to woo voters. It is conceivable that the government would continue to announce them, but these would not be made part of the interim Budget. Therefore, the convention of the interim Budget steering clear of taxation initiatives or big schemes would be honoured. But the likely impact on the government’s finances in 2024-25 would not be completely ruled out, as the promises made would have to be honoured during the next year.

Remember that the current year’s Budget has already taken a hit on account of a few additional relief measures announced during the year. The extension of the free food grain supplies scheme under the public distribution system beyond December 2023 and the rising subsidies burden on account of fertilisers and cooking gas, among other things, have meant an additional cash outgo of Rs 58,000 crore during 2023-24. More cash outgo may have to be budgeted for and that will be evident when the interim Budget is presented. However, its impact is likely to be significantly diluted, thanks to the continuing revenue buoyancy and a slowdown in expenditure.

But what the finance minister has achieved through her statement before industry leaders is something more important. She has made sure that the accounts of government finances to be presented before Parliament on February 1, 2024 would be realistic. The danger of the interim Budget presenting over-optimistic revenue numbers, in the belief that these distortions could be corrected in the final Budget to be presented after the general elections, has perhaps been averted. The huge revisions in the numbers for the 2018-19 Budget were a result of such understatement of expenditure and overstatement of revenue projections.

The last five Budgets of Ms Sitharaman will stand out for several bold and prudent initiatives. These include imparting a commendable degree of transparency by gradually eliminating off-Budget expenditure items, leading to a correct assessment of the government’s deficit numbers, a reduction in corporation tax rates (though done outside the Budget), encouragement to taxpayers to opt for an exemptions-free taxation regime, a hefty increase in the government’s capital expenditure, and the pursuit of a slow but steady path of fiscal consolidation.

Last week’s statement by Ms Sitharaman shows that she would add yet another commendable feature in her budget-making initiatives by ensuring that an interim Budget honours the convention of avoiding any announcement on new taxation measures or big schemes. On February 1, 2024 it will become clear if the finance minister has fulfilled that promise and maintained the sanctity of an interim Budget.