Balancing the Budget: Is fiscal conservatism on the cards during the Interim Budget?

As the month of February draws closer, there is always anticipation about what the Union Budget will bring. Despite this being an Interim Budget, the anticipation is higher this year as voters are hoping that a few goodies will be announced ahead of the General Elections. It is widely expected that Union Finance Minister Nirmala Sitharaman will maintain fiscal discipline, but she is also expected to announce a few dispensations.

A full Budget will be presented later in the year after the new government is sworn in. The Interim Budget is expected to be a Vote on Account for the first few months of FY25 to ensure smooth expenditure and provide a preliminary outlook of the new fiscal. This will include an outline of the expected growth in revenue as well as expenditure for FY24 (Revised Estimate) and FY25 (Budget Estimate), which would also serve as a report card on the economy and the expectation going forward. “The Interim Budget, also called a Vote on Account, enables undertaking of expenditures at the beginning of the next fiscal until the main Budget is presented. It is not used for the initiation of any major policy changes,” D.K. Srivastava, Chief Policy Advisor at consultancy EY India, wrote in a recent report. “One key variable of interest would be the achieved improvement in indicators of fiscal imbalance, such as fiscal and revenue deficits and government debt relative to GDP after their sharp departures in the Covid-19-affected year of FY21.”

Fiscal discipline

Better-than-anticipated growth—at 7.2 per cent in FY23 and an estimated 7.3 per cent in FY24—is expected to give the government some cushion in its plans for the Interim Budget. Tax collections remained robust at `14.3 lakh crore or 61.6 per cent of the Budget Estimate between April and November 2023 and it is expected to help offset the shortfall in disinvestment proceeds that were at just Rs 8,858.55 crore in the period as against the full-year target of `51,000 crore. (See graphic ‘Econometrics’)

However growth is likely to slow down in FY25 due to external factors and policy prescriptions will be needed to keep afloat India’s aspiration of turning into a $5-trillion economy.

The central government’s spending has also been well within limits, and the focus on capital expenditure is also seen to continue. “The central government capex has surged by 3x over the past five years, taking the government capex to GDP ratio to an all-time-high of 3.3 per cent of GDP in FY24. The incremental growth from here could turn limited, at least in FY25, as welfare spending pressures and budget consolidation takes a toll. We expect only about 7-8 per cent growth in government capex budget for FY25,” global brokerage Jefferies said in a recent note.

Fiscal deficit was contained at 50.7 per cent of the Budget Estimate in April-November 2023, but analysts believe that it would breach the 5.9 per cent of GDP target for FY24 and come in at around 6 per cent due to lower nominal GDP growth of 8.9 per cent compared to the budget assumption of 10.5 per cent.

Big-ticket announcements?

The overall performance on both the revenue and expenditure fronts is expected to give the government more room to spend on at least a few schemes that could please voters, though it may not go in for large-scale populist announcements. “The BJP’s strong performance in the state polls notwithstanding, we believe that the tilt to welfare policies should gain momentum in the run-up to the April-May 2024 polls,” said Jefferies.

Some popular schemes may also be expanded or get extra resources to boost implementation, such as Housing for All and health insurance, Jefferies said, adding that the government’s farmer’s cash transfer scheme may see an increase. “Overall, we expect the social spending of government (excluding subsidies) to rise by ~7-8 per cent in FY25E against a 3 per cent increase in FY24E,” it said.

To tone down expectations, the Finance Minister has already said that the Interim Budget will not have any “spectacular announcements”. But going by past trends, Interim Budgets have more often than not held a promise of what the government would offer if it were to come back to power. A Business Today analysis of the past four Interim Budgets shows that barring 2009-10, the rest have had at least one promise to woo the electorate. For instance, in 2004-05, it was the extension of the Antyodaya Anna Yojana and setting up of six new AIIMS-like hospitals ; in 2014-15, it was One Rank One Pension and a moratorium on education loans; and in 2019-20, it was income support to farmers and no tax on income up to `5 lakh for individuals.

While the government has already extended the Pradhan Mantri Garib Kalyan Anna Yojana by five years, a fuel price cut may be in the offing, say experts. Other expectations include a decision on the New Pension Scheme for government employees and some relief to rural households through further income support. There are also rumblings about an Eighth Pay Commission for government employees. To boost private investment, the Budget may also indicate the government’s intent for further reforms for ease of doing business and the performance-linked incentive (PLI) scheme.

“The government has maintained fiscal discipline and even if it chooses to increase the allocation for some scheme or introduce a new scheme... A large fiscal slippage is unlikely,” says Devendra Kumar Pant, Chief Economist and Head-Public Finance at India Ratings and Research.

What is also important is that from 5.9 per cent in FY26, fiscal deficit in two years has to be consolidated by 1.4 percentage points. “Three important factors to achieve this are sustained economic growth, revenue buoyancy and expenditure rationalisaton or control,” says Pant.

Tax promises

Traditionally, Interim Budgets stay away from tax proposals although the government of the day often chooses to announce some kind of relief. This has given rise to expectations that the Interim Budget may provide some respite, given that high prices have eaten into most household budgets over the past one year. Mahesh Jaisingh, Partner and Leader-Indirect Tax at Deloitte India, notes that the government’s focus will be on Make in India, creating job opportunities, and taking measures for a strong and stable economy. His key expectations include an amnesty scheme for customs, digitalisation of the customs litigation process and continued exemption of integrated goods and tax services and compensation cess from the Manufacturing and Other Operations in a Customs Bonded Warehouse scheme (that provides exemption/deferment of duty applicable on capital goods and inputs at the time of import).

But as is often the case, Budgets are often fine-tuned at the last moment, taking into account more recent macroeconomic data as well as ground-level realities. The Interim Budget too will have to navigate this and come up with a mix of the pragmatic with the populist. And that’s a tightrope walk.

@surabhi_prasad