Union Budget 2024: Fiscal balance amid coalition compromises

Tinkering with rates proposed in the Budget does not change the protectionist stance and there is a need for rethink on the issue

The much-awaited first Budget of the third Narendra Modi government is on predicted lines. This is the seventh straight Budget presented by the finance minister. The Budget attempts to set priorities for the long-term goal of achieving “developed-country” status in the centenary year of Independence. At the same time, it has taken cognizance of coalition compulsions and has acceded to the demand from the allies whose continued support is critical. Most of the revenue and expenditure numbers are quite close to those presented in the Interim Budget except for a substantial increase in non-tax revenue due to a higher dividend of Rs 2.1 trillion as against Rs 1 trillion given in the Interim Budget. There is a marginal improvement in the deficit estimates.
 

The Budgets presented by Finance Minister Nirmala Sitharaman have acquired three desirable features. First, they are more transparent and there are no hidden items and off-Budget liabilities. That helps to understand the macroeconomic implications better. Second, in the post-pandemic era, there has been a concerted attempt at fiscal consolidation towards containing the fiscal deficit target of 4.5 per cent of gross domestic product by 2025-26. The minister has promised to continue to reduce the fiscal deficit even thereafter, bringing it down each year to steer central government debt on the declining path, though the extent and the timing of this are unclear. Finally, fiscal consolidation has been done while significantly increasing the capital outlay to keep up growth momentum in the economy. The capital outlay of the Union government relative to gross domestic product (GDP) has shown a steady increase from 1.7 per cent in 2019-20 to 3.4 per cent in the 2024-25 Budget. 
 

As mentioned above, the deficit numbers are marginally better than those presented in the Interim Budget. The fiscal deficit is now estimated at 4.9 per cent (of GDP) instead of 5.1 per cent and the revenue deficit is estimated at 1.8 per cent as against the estimated 2 per cent in the Interim Budget. As compared to the provisional actuals, the fiscal deficit is lower by 70 basis points from 5.6 per cent to 4.9 per cent and the revenue deficit is lower by 80 basis points from 2.6 per cent to 1.8 per cent. It may not be difficult to reach the fiscal deficit target of 4.5 per cent, or even better it next year.
 

The additional dividend of Rs 1.1 trillion received from the Reserve Bank of India over the estimate presented in the Interim Budget was used mainly to meet the demands of the two major coalition partners. While the Union government desisted from conceding “special-category” status to Bihar and Andhra Pradesh, the pivotal coalition partners were able to extract substantially higher packages. Bihar was able to get an allocation of Rs 26,000 crore for a two-lane bridge over the Ganga in Buxar and another Rs 21,000 crore for a new 2,400-Mw power plant in Pirpainti. Besides, several road-connectivity projects, new airports, medical colleges, tourism projects, and sports infrastructure have been promised to the state. The state is also a part of the proposed “Purvodaya” — an all-round development of the eastern part of the country. Andhra Pradesh was also able to strike a good bargain. The state will receive Rs 15,000 crore for building a new capital as promised in the Andhra Pradesh Reorganisation Act. The finance required for the completion of the Polavaram irrigation project will be provided. The Budget has also promised to provide funds for creating essential infrastructure such as water, power, railways, and roads on the Visakhapatnam-Chennai industrial corridor and the Hyderabad-Bengaluru industrial corridor. Additional funds have been allocated for capital investment in backward regions of Rayalaseema, Prakasam, and North Coastal Andhra. Even though it is a southern state, it is part of the “Purvodaya” project. The outlay on these is likely to be substantial not only this year but also in the years to come.
 

The problem with such asymmetric arrangements is that they lack objectivity. These decisions arise from the configuration of political power and the ruling party can always entice other outfits to align with it to demand more funds. This is against the long-term interests of having a healthy and sustaining federalism. There is a mechanism for objectively making transfers through the constitutionally mandated Finance Commission, an expert body that could be entrusted with the task of assessing the requirements. The coming years will see more such demands from coalition partners, and it remains to be seen how to avoid them.
 

Achieving “developed-country” status requires being competitive. No country has achieved a consistent 8 per cent annual average growth rate for a long period by keeping tariffs at elevated levels. Tinkering with rates proposed in the Budget does not change the protectionist stance and there is a need for rethinking on the issue. Similarly, the time has come to withdraw the option of paying income tax in accordance with the old regime and rationalise the rates in the new. The best-practice approach to tax reform is to have a broad base, low and less differentiated rates, and a simple system. Loading the tax policy with several objectives by giving tax preferences only increases compliance costs and creates distortions. There are six rates of personal income tax now and these can be reduced to three without losing revenue. Hopefully, the rationalisation will be done sooner rather than later. The finance minister touched upon expanding the base of goods and services tax (GST), and hopefully that will be taken up in the next GST Council meeting.

The writer was member, Fourteenth Finance Commission, and was director, National Institute of Public Finance and Policy