Budget 2024: The long road to fiscal consolidation

The Union Minister for Finance and Corporate Affairs, Smt. Nirmala Sitharaman commences Final stage of Union Budget 2024-25 with Halwa Ceremony, in New Delhi on January 24, 2024.

The upcoming general elections notwithstanding, the BJP-led government is likely to continue on the fiscal consolidation path when it announces the interim budget on February 1. Unprecedented challenges posed by the coronavirus pandemic four years ago pushed the government to shift its goalpost by raising the fiscal deficit target in FY22 to 6.8 percent from 3 percent (see table).

Now, the government aims to reduce the gap between revenue and expenditure to 5.3 percent and 4.5 percent in FY25 and FY26 respectively and seems to be well on course to meet its FY24 commitment to narrow the shortfall to 5.9 percent (see table).

“Concerns surrounding fiscal slippage in an election year are understandable. However, we expect the centre to meet their fiscal deficit target despite poll pressure,” says Bank of America’s economist Aastha Gudwani.

To be clear, Minister of Finance Nirmala Sitharaman has ruled out any big-bang announcements in her sixth budget. “I am not going to play a 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. So, the budget that the government presents will just be to meet the expenditure of the government till a new government comes to play,” she said at the Global Economic Policy Forum in December.

A full budget for the current fiscal will be announced by the elected government in July.

But market participants, by-and-large, are confident that the government will refrain from populist schemes and deliver an investment-led budget to fast-track growth. Economists and brokerages expect capital expenditure to rise at a slower pace of 10 percent (to Rs 10.2 lakh crore) in contrast to the 20 percent-plus uptick seen in the previous two years.

“The government's intent is to consolidate fiscal deficit through capital expenditure-driven growth instead of expenditure compression. We expect this strategy to continue in FY25 Union Budget as well,” Gudwani adds.

Moreover, the rural economy isn’t out of the woods completely and the government is likely to focus on measures to boost investments in the rural sector and broaden the scope of production linked incentive (PLI) schemes to support manufacturing sectors such as chemicals, for example. 

Also read: Will elections make interim budget 2024 inflationary

Fiscal math

In the current fiscal year, government coffers are ringing with higher-than-budgeted tax and non-tax revenue including Reserve Bank of India dividend and improved profitability of PSUs. This will help to offset the shortfall in divestment proceeds and a higher-than-budgeted subsidy bill and other revenue expenses.

In a nutshell, against this backdrop, the government is seen to be on track to achieve its fiscal deficit target for FY24 and FY25 at 5.9 percent and 5.3 percent respectively. Besides, as per estimates, gross market borrowing is likely to remain elevated and broadly unchanged at around Rs 15.2 lakh crore in FY25.

“Tax revenues have soared and overall revenues are running 0.3 percent of GDP higher than budgeted. This will likely fund the rise in subsidies and any special package announced on budget day,” says Pranjul Bhandari, chief economist, India and Indonesia, HSBC. “We also expect a normalisation in current expenditure post elections, and unchanged and elevated capex momentum.”

Between April and November, the government has utilised 50.7 percent of the budgeted fiscal deficit target for the current fiscal year against the median of around 75 percent.

This is partly due to robust corporate and income tax collections. Budget estimates pegged direct tax collections at Rs 18.23 lakh crore. So far, the government has mopped up over Rs 14.7 lakh crore or 80 percent of the budgeted amount.

GST collections have surprised on the upside and the monthly rate has zoomed up to Rs 1.66 lakh crore in FY24 from Rs 98,000 in FY19. Central GST collections are likely to surpass the budget estimate of Rs 8.1 lakh crore by around Rs 10,000 crore in the current fiscal year.   

Buoyant tax collections have helped to cushion the impact of lower-than-expected excise and custom duties collection. Also, divestment of government holding in public sector companies is likely to miss the budget target by nearly Rs 51,000 crore. But matter-of-fact divestment proceeds have exceeded budget estimates in only three of the last 16 years.  

Overall, according to Bank of America, tax revenue is likely to exceed budget estimates by Rs 69,300 crore and non-tax revenue by Rs 48,300 crore.  However, on the expenditure front, the picture is less rosy, mainly offset, as explained, by tax and non-tax revenue.

Revenue expenditure comprises 85 percent of the total expenditure. Government borrowing has been high and over the past few years interest expense has gone up and may further rise to over Rs 11 lakh crore in FY25. Importantly, the subsidy bill, largely divided into food, fuel, and fertiliser, exceeds the budgeted outlay. This can be attributed to the extension of the free grain programme and the cut in price of cooking gas cylinders which led to an additional outgo of Rs 33,000 crore. Analysts expect the subsidy bill to rise to Rs 4.25 lakh crore in FY25.

Capital expenditure accounts for 15 percent of the total expenses. Capital outlay has grown from 1.6 percent of the GDP in FY21 to 2.8 percent of GDP in FY24. “One of the striking features of fiscal management under the current leadership has been to drive capital expenditure-driven growth which in turn aids revenue mobilisation and finally facilitates fiscal consolidation. Accordingly, ratio of revenue expenditure to capital outlay [RECO] has been falling steadily from 7.6 in FY20 to 4.2 in FY24,” observes Gudwani.

In the last 10 years, the government has tapped into market borrowings as a major source to fund about 65 percent of the fiscal deficit. Pankaj Pathak, fund manager-fixed income, Quantum AMC, says any deviation from the fiscal glide path could negatively impact the bond market.

“Fiscal deficit was expanded to provide stimulus during the pandemic. The economy has now come out of that stress. So, there is a strong case for the government to withdraw the stimulus. For that sooner will be better as India’s public debt is significantly higher than its emerging market peers. Also, increasing foreign interest in Indian bonds will put the fiscal deficit and debt position in greater scrutiny going forward,” Pathak adds.

The central government’s debt burden, as a percentage of GDP, has considerably increased from over 51 percent in FY20 to over 80 percent now. Unless India sustains a relatively high growth trajectory, the road to fiscal consolidation is long with possible speed bumps due to a highly volatile global environment.