Will elections make interim budget 2024 inflationary

The possibility of some populist schemes can't be ruled out in the interim budget as general elections are due in April-May 2024, but the government has limited fiscal room due to uncertainties amid volatile inflation

By Nasrin Sultana

Published: Jan 22, 2024 04:47:00 PM IST

Updated: Jan 23, 2024 11:43:31 AM IST

In an economic environment of uncertainties due to volatile inflation, the government has very little room for fiscal spends. Illustration: Chaitanya Dinesh Surpur

As the interim budget 2024 is merely for a few months, before the general elections decide who gets to form government at the Centre for the next five years, any big reformative announcement is not expected. In an economic environment of uncertainties due to volatile inflation, the government has very little room for fiscal spends. However, there could be some populist measures in the budget with some announcements for farm economy and lower income class but is unlikely to announce any substantial allocations.

While the consumption demand in the Indian economy has been relatively weak, Indranil Pan, chief economist, Yes Bank, does not anticipate any budget provisions specifically aimed at enhancing it. An inflationary budget implies expectations of expansionary policies, particularly if expenditures are directed towards boosting consumption. “The government has consistently favoured capital expenditure and investments to stimulate domestic growth, expecting a positive spill over effect on private investments and, subsequently, on consumption. This budget is expected to continue on a path of consolidation and align with the aspiration to reach a 4.5 percent fiscal target by FY25-26,” Pan explains.

According to Pan, it is crucial for the government to demonstrate credible efforts towards achieving this target, especially as India will join the JP Morgan Global Bond Index in June 2024. Investors, closely monitoring India’s economic indicators, will be sensitive to any uncertainties. An imbalance could lead to significant capital outflows. It would be disappointing if the government fails to make substantial progress towards a fiscal deficit/GDP target of 5.3- 5.4 percent in FY25, Pan adds.

In an election year, the government usually tables the vote-on-account or the interim budget. A vote-on-account seeks approvals for essential expenditure outlays until the polls, while the interim budget broadly includes an assessment of the current state of the economy, current/capex expenditures, and receipts, as well as revised estimates of the current financial year and estimates for the year ahead.

Rahul Bajoria, MD and head of emerging markets Asia economies (ex-China), Barclays, expects the interim budget to signal continued fiscal consolidation over the medium term but will stop short of any big bang announcements, given its interim nature. Further rationalisation of the direct tax code, in the form of defining the income slabs for tax rebates is likely (which is ongoing since the past couple of budgets).

After the general elections are concluded in April-May 2024, the incoming administration will present the regular budget around mid-2024.

According to Madan Sabnavis, chief economist, Bank of Baroda, the interim budget is unlikely to be inflationary in nature. “The budget would tend to follow the earlier path in terms of revenue projections and expenditure, and focus on bringing down the fiscal deficit ratio. One may expect the overall size of the budget to increase by 10-12 percent, which will be equivalent to that last year,” adds Sabnavis.

Also read: Markets bleed: Is a storm brewing ahead of budget 2024?

He will watch the government’s fiscal path and the overall borrowing. “Here too, I think it will be non-disruptive as the government can use other sources of funding to cover the deficit. The subsidy amounts would also be interesting especially on fertilisers as global crude has stabilised. It would also be interesting to see how much is allocated for PLI as this is one scheme where a lot has been spoken of but there has been more of articulation than action in most sectors,” says Sabnavis.

Others concur. Radhika Rao, senior economist, DBS Group Research, expects the interim budget to propose modest pro-demand steps to address near-term risks. To recall, back in February 2019, the incumbent administration had announced fiscal concessions and benefits to the farm sector and other deserving parts of the society. “This time, the ruling party dominated the recently-held state elections, lowering the likelihood of aggressive competitive populism,” Rao adds.

While the vote-on-account will see the government seek permission from the Parliament to cover crucial expenditures until the general elections, Rao expects a few measures to be proposed to support the rural/farming community, as the sector faces near-term challenges like poor weather conditions, the fallout of climate change, and inflationary pressures (food and fertilisers). “Targeted support by way of transfers to make up for output losses due to weather, higher farm insurance outlays, boost to disbursements towards rural employment schemes, irrigation facilities, etc., might be tapped,” she adds.

Administrative measures via export restrictions or sops on fertiliser purchases and farm inputs could also be part of the mix to relieve purchasing power. Besides these, more durable initiatives like further encouraging the development of the food-processing industry, skill development, social spending (education, health), and boosting rural infrastructure are other avenues that might get attention. However, she adds that those measures could possibly be detailed at the mid-2024 budget, assuming the incumbent government retains power at the centre.

Will general elections influence the budget spends and tone?

Given the extension of the free food scheme and pre-election spending requirements, Bajoria expects revenue expenditure (revex) to grow slightly faster in the next fiscal year than that budgeted for FY2023-24. He expects the government to peg total expenditure at about Rs 49.1 trillion for FY2024-25, about 9 percent higher than FY24's budgeted Rs 45 trillion. Revex will likely be budgeted at Rs 37.6 trillion with likely increases in allocations to flagship schemes such as PM Kisan, and MGNREGS.

Nikhil Gupta, economist, institutional equities research at Motilal Oswal Financial Services, also agrees the upcoming general elections may warrant some announcements for farm economy and lower income class. Further, although tax receipts have been higher than targets for the last three years, the fiscal deficit needs to be narrowed further (and considerably) to avoid any crowding out as and when the corporate investments pick up.

“Not only is there any need for economic stimulation, it is also very clear that the government has limited fiscal space for such measures. Even if there are some populist measures in the Interim Budget 2024-25, it is unlikely that they will be accompanied by substantial allocations,” Gupta elaborates. He adds that possibility of some populist schemes can’t be ruled out in the interim budget.

Also read: Chaotic bond markets to continue to combat inflation and recession fears in 2024

In 2019, the interim budget 2019-20 announced PM Kisan (which was made effective retrospectively from December 2018) and ‘PM Shram-Yogi Maandhan’ – a pension scheme for the unorganized sector workers with monthly income up to Rs 15,000.

Gupta expects the interim budget to expand the PM Kisan scheme by as much as 50 percent to Rs 9,000 per annum or increased benefits in the form of insurance scheme or higher MGNREGA allocation (which is a demand-driven program). However, rural spending actually declined 3 percent year-on-year in April to November.

Some of the sectors which may be prioritised in the interim budget are agriculture, cut in corporate income tax rate while residential property may get benefits from further support from the government.

According to Aditi Nayar, chief economist, Icra, any major policy changes are unlikely at this juncture. However, the government’s capex expansion and the extent of fiscal consolidation would be closely watched.

The government’s revenue expenditure grew by 3.6 percent (year-on-year) to Rs 20.7 trillion in April-Nov FY2024, from Rs 20 trillion in April-November FY2023 (57.8 percent of FY2023 provisional), amid a decline in the total outgo for major subsidies (-19.4%), partly offsetting the uptick in interest payments.

The year-on-year contraction in the outgo for major subsidies to Rs 2.4 trillion in April- November FY2024, (which is 64.8 percent of FY2024 budgeted estimates), from Rs 3 trillion in April to November FY2023 (56.7 percent of FY2023 provisional), was broadbased, including fertiliser (-16.2 percent), fuel (-18.8 percent) and food (-22.6 percent) subsidies in April-November FY2024.

However, Pan believes general elections will not have a significant impact. The major pre-election announcement has been the free food programme via the Public Distribution System (PDS). Pan does not foresee any additional measures announced in the interim budget with the elections in mind.

“The upcoming vote-on-account budget is expected to merely present a statement of revenues and expenditures, which is essential to operate the government machinery until a new government is formed and a full budget is proposed. Therefore, we don’t anticipate any major reform proposals within this budget,” Pan adds.