Budget 2024: Fiscal marksmanship on display; over to implementation

The Union Budget is always much awaited to glean the policy as well as fiscal direction that the Government of India (GoI) intends to take. This was a special Budget, presented after the parliamentary elections, which has led to comparisons with both the fiscal outcome for FY24 as well as the Interim Budget Estimates for FY25.

The overall fiscal math appears credible on a number of counts. Let’s start with the revenue-side assessment; the pace of growth of the gross tax collections vis-a-vis the provisional actuals for FY24 is pencilled in at 10.8 per cent, which seems appropriate given the tax modifications announced in the Budget, as well as the nominal GDP growth that it has estimated for FY25.

 

On the personal income tax front, the Budget brought in some modest tweaks, which should support sentiment and consumption for salaried individuals in the income bracket of up to around Rs 15-20 lakh, a segment of households for whom inflation is possibly a bigger issue. However, this measure is unlikely to impose an onerous burden of revenue forgone, as much of the tax relief will likely be spent on small-ticket items that attract indirect taxes.

Further, a number of changes were announced on the customs duty side, the most surprising of which was the reduction in the duty on silver and gold. This will undoubtedly support the relatively labour-intensive industry through enhanced demand, given the elevated global prices and curb illegal imports and smuggling. Moreover, while it will widen the current account deficit, the size of the same remains far from worrying levels.

Devolution of the taxes to the state governments has been estimated to grow by around 10.6 per cent to Rs 12.5 trillion in the FY25 budget estimates from Rs 11.3 trillion as per the provisional actuals for FY24. Interestingly, the latter is equivalent to 3.8 per cent of GDP, moderately higher than the Centre’s capital expenditure.

On net, while the estimate for the non-tax revenues has been raised by around Rs 1.5 trillion, led largely by the dividend from the Reserve Bank of India, the net tax revenues have actually been reduced by Rs 200 billion relative to the Interim Budget Estimates. Overall, the increase in the revenue receipts as compared to the Interim Budget Estimates stands at Rs 1.3 trillion, a shade higher than our expectation of Rs 1.2 trillion.

We had anticipated that half of the revenue upside would be spent and the other half would be used to compress the fiscal deficit. The July 2024 Budget has enhanced the revenue expenditure by Rs 550 billion to support a number of sectors, with a special focus on the rural economy and some specific states. Nevertheless, it is far from profligate, with the fiscal deficit now estimated at 4.9 per cent of GDP, as opposed to the Interim Budget Estimates of 5.1 per cent of GDP, even as the cut in the market borrowings for FY25 is narrower than what we had anticipated.

Interestingly, the Budget has refrained from revealing rolling targets for the fiscal deficit for the next two years. Regardless, it has reiterated that the GoI’s fiscal deficit will be reduced to below 4.5 per cent of GDP in FY26, which is welcome. This admittedly entails a modest fiscal compression of just 0.4 per cent of GDP in FY26, as opposed to 0.7 per cent of GDP in FY25. However, it resonates with our view that fiscal consolidation will be more challenging to undertake next year, which will see expenditure kicking off much earlier than in FY24, which has seen a lull during the election period.

Further, the finance minister revealed that the subsequent medium-term fiscal consolidation path shall be linked to a reduction in the debt/GDP ratio instead of continued compression of the fiscal deficit/GDP ratio. This will afford the government a degree of flexibility to chart an appropriate fiscal course that builds in higher capital spending as well as support to meeting the climate goals, in an increasingly uncertain global environment.

The Union Budget for FY25 also had a lot to say on the climate side, including announcements to reduce emissions through natural farming with support from bio-input resource centres. Further funding and support will be provided for climate-resilient varieties, which should aid in both food security and moderating inflationary pressures.

The GoI also aims to create a green ecosystem by creating climate consciousness among farmers, organisations and society. Announcements on the installation of rooftop solar plants for individual customers will also serve multiple purposes, aiding the green transition while reducing households’ energy bills.

Overall, the July 2024 Union Budget scores very well from the vantage point of an economist, especially in terms of the fiscal math. The policy direction is positive as well, but the proof will lie in the implementation.

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Aditi Nayar, chief economist, head of research & outreach, ICRA. Views are her own.