Will interim Budget 2024 revive demand and investment?

As the government prepares to present the interim Budget on February 1, we bring you the second episode of Business Standard's special segment on the vote on account. While the first episode explained the stance that the Budget would take, this one will explore whether it will revive demand, investment or both? This question arises out of key data that have emerged recently. Economists have said that the weak consumption growth in FY24 is concerning as it would be the slowest growth rate in the past two decades, barring the pandemic year of FY21. They have also warned that it is important to bolster consumption growth if India wants to sustain investment growth. So, how is the interim Budget likely to address this challenge? To find out the answer, read the transcript of the Business Standard Morning Show's second interim Budget special.     

 

The interim Budget 2024-25 on February 1 will likely see the central government boost investment, while still sticking to the fiscal consolidation path. However, the country may have to wait for a demand stimulus, which is more likely to come with the full Budget in July 2024 after the Lok Sabha elections.  

 

On whether interim Budget 2024 would revive demand and investment, Business Standard's AK Bhattacharya said:

• Choice between investment promotion and demand stimulus is critical in any Budget
• First Advance Estimates indicate low private consumption demand for FY24
• Govt may be inclined towards a demand stimulus in interim Budget or full Budget later
• Govt’s track record suggests it may opt for more investment instead
• Govt will also stay true to fiscal consolidation path  

Private Final Consumption Expenditure, or PFCE, is expected to rise to 60.9 per cent of GDP in FY24, from 60.6 per cent in FY23 in nominal terms. However, private spending growth is projected to slow down to 4.4 per cent in FY24, from 7.5 per cent in FY23 in real terms. This is what the first Advance Estimates of GDP for FY24 released by the National Statistical Office tell us.

India Ratings Principal Economist Sunil Kumar Sinha told Business Standard that PFCE growth in FY24 would be the slowest since FY03, barring the Covid year of FY21. PFCE is a proxy for household consumption. Meanwhile, CARE Ratings Chief Economist Rajani Sinha also sees weak consumption growth as a concern.    

While the government is still likely to focus on boosting investment, Business Standard’s Ruchika Chitravanshi pointed out that demand and investment were interlinked:    

• Demand and investment are interlinked
• Govt’s capex push expected to continue
• There are some signs that govt capex is crowding in private investment  
• Private investment will increase as demand increases
• So, govt needs to address demand
• One of the things govt can do is keep fiscal deficit lower
• How govt strikes a balance in interim Budget will have to be seen  

   

The Centre’s post-Covid fiscal consolidation plan calls for reducing the fiscal deficit to 4.5 per cent of GDP by FY26. The government has budgeted for a fiscal deficit of 5.9 per cent of GDP in FY24. The fiscal deficit was 6.4 per cent in FY23.  

So that its commitment to fiscal consolidation is not diluted, the government must ensure that higher investments yield the best results. Not doing so could pose a risk.

This is what Business Standard's AK Bhattacharya had to say on the topic:

• Significant increase in govt capex in past 3 years compromised govt’s fiscal consolidation plans
• Every rupee of capex must get the best results to achieve fiscal deficit of 4.5% of GDP by FY26
• Govt investment must be directed to sectors with good private sector investment demand
• Public-private participation can be encouraged in infra sector  

Government capex has been leading investment growth. And, the First Advance Estimates of GDP reveal that investment is the main driver of growth in FY24. In real terms, growth in investment demand, as represented by gross fixed capital formation, or GFCF, is estimated to ease to 10.3 per cent, from 11.4 per cent in FY23. Meanwhile, GFCF is expected to rise to 29.8 per cent of GDP in FY24, from 29.2 per cent in FY23 in nominal terms. While growth in investment demand will remain the mainstay of economic recovery, analysts have warned that a broad-based recovery is still some time away and a slowdown in investments in the second half of FY24 is expected.

Heading into the interim Budget, the government can bank on the continuing revenue buoyancy and a slowdown in expenditure. Nonetheless, will it seek to raise additional revenues on February 1 to increase investments?

This was A K Bhattacharya's answer

• Govt will announce its investment plans in the interim Budget
• But it will not announce any measures for raising resources to fund this plan
• Govt will defer the latter until the full Budget in July 2024  

With elections around the corner, the government may wish to announce tax giveaways. This would also create a demand stimulus. But as AK Bhattacharya points out, convention demands that there are no tax concessions in an interim Budget, even though this convention has been ignored before, like in 2019. Still, given Finance Minister Nirmala Sitharaman’s record, the government will wait for the full Budget to announce tax concessions.