Budget 2024-25 – Prospects & Pockets of Anxiety

Given that the general elections were round the corner, it was expected to be a Vote On Account, but eventually it turned out to be more than an interim budget. Budget 2024 -25 is distinguished by the following features:

1. Fiscal Prudence
2. Absence of Populist Flourishes Even in an Election Year
3. Quality of Expenditure
4. Walking the Talk on Environment (at least to some extent)

Fiscal Prudence: While the fiscal deficit in the revised budget estimates for FY24 came in at 5.8% of the GDP against the projected 5.9%, for FY 25 it is pegged at 5.1% and FY 26 at 4.5%. This will be quite an achievement. The question is how credible is this claim. The underlying assumptions, however, lend credence to the 5.1% deficit figure. A tax growth of 12% is assumed based on a nominal GDP growth of 10.5% and a tax buoyancy of 1.2. The CSO, RBI and the IMF are in agreement on the real GDP growth for India being in the vicinity of 7% for FY 25. Hence a GDP deflator (implicit inflation) of 3.5% looks quite conservative and going by the past, tax buoyancy of 1.2% appears very much achievable. Coupled with limiting the growth in revenue expenditure to 6% (it was 11% during 2020 – 24) and eschewing populist sops, deficit of 5.1% of GDP does appear realistic.

And this achievement hasn’t come any time soon. In June this year JP Morgan and Bloomberg Emerging Market indices are scheduled to include specified Indian government bonds. This development, while promoting foreign participation in Indian debt market, comes with the

prospect of increased scrutiny by foreign investors of the deficit levels of the Indian government. Unbridled fiscal deficits can certainly tempt bond vigilantes to have a run on the bond markets, undermining both fiscal and monetary policies of the country. The government choosing to tread the path of fiscal rectitude makes this possibility less likely.

No wonder the bond markets celebrated the budget day with a fall in yield of 10 year G-Sec by 10 basis points. Experts estimate that the inclusion of Indian bonds in the above indices is likely to result in an inflow of US $30 to 40 billion. This is estimated to further depress yields by 20 to 30 basis points. As of mid January 2024, scheduled commercial banks were holding government securities worth around Rs 61.5 thousand crores. A fall of 35 basis points would result in treasury profits of around Rs 3000 crores for the banks, without adjusting for the duration of their debt portfolio or HTM (Held to Maturity) and AFS (Available for Sale) portions. Since bulk of these profits are expected to accrue to the PSU banks, one can appreciate why SBI along with other PSU banks is having a good run in the stock markets since the budget.

Quality of Expenditure: So are our public finances in fine fettle? Far from it. Granular analysis points out to pockets of anxiety. On the face of it the quality of expenditure seems to be improving with capital outlay increasing by 17% to over Rs 11 lac crores accounting for 22% of the total budget of about Rs 48 lac crores. Outlay on infrastructure helps accelerate GDP growth over long term and contain both fiscal and current account deficits if there is no leakage of such outlays. But at the prevailing state of our fisc, government spending on infrastructure has already run into fiscal wall. Despite salutary decline in deficits, the absolute level of debt pile is steadily increasing with interest payments on accumulated debt taking nearly 25% of the budget, preempting fiscal space for further spending on infrastructure. Even at the current elevated level of capital outlay, public sector (including outlay by States), accounts for only about 17% of the total investment in the economy, with corporate and household sectors accounting for 87%. It is in this context, Finance Secretary Mr. Somanathan’s statement that government investment is no substitute for investment by private sector, acquires significance. Over the last few years aggregate level of investment in the economy as a percentage of GDP has come down and at present is at 30% of GDP. If we aspire to shift from current GDP growth of around 6% to 7% plus, we need to increase investment level from 30 to 35% given that the incremental capital output ratio is 5. This certainly is a tall task given the twin challenges posed by prevailing interest burden and the demand constraint that the household sector is facing. The investment by the household sector is estimated on a residual basis after accounting for gross fixed capital formation in the public and corporate sectors. Investment by household sector in 2013-14 which was at 42.6% of the total was down to 39.5% in 2021-22. It is important to note that household sector comprises informal sector covering unregistered small and micro enterprises(SMEs) and proprietary firms. So even as officials keep claiming uptick in investment activity in the listed corporate space, there is pain, albeit hidden, in the informal sector because of loss of employment and income accentuated by inflation. This has adversely affected demand for goods and services of mass consumption which has slowed down capacity expansion in the corporate sector. The affluent sections of the society are able and willing to spend on domestic and imported luxury goods. This can be seen in the spike in demand for luxury houses while that for affordable housing remaining sluggish despite government incentives, or in sale of luxury cars taking off, even as demand for entry level two wheelers remaining flat or declining. So it appears that demand constraint will emerge as a major challenge in budget management going forward.

Environment:Budget 24 has quite a few measures to mitigate climate

crisis, like viability gap funding for harnessing offshore wind energy, “gasification” of the economy, rooftop solarisation, among others. The proposal to cover one crore households under rooftop solarisation programme with an outlay of Rs 75000 crores spread over the next five years deserves special mention. The solarisation route to providing 300 units of free electricity is an innovative and superior approach as compared to offering populist sops like free power. This is in keeping with the government attempt to shift more and more people from what is called “dependency nexus” driven by patronage politics to empowerment of those who are relatively disadvantaged. This is seen in its focus on creating entrepreneurs through skilling initiatives, direct benefit transfers, credit guarantee schemes, facilitating time bound settlement SME dues, setting up a fund of Rs 1 lac crores to provide long term soft loans to start-ups in IT and other sectors, etc. This seems to be the government’s unstated approach to the unacknowledged problem of unemployment. This subtle but paradigm shift deserves appreciation. The results may be slow in coming, but when they do, they are likely to be more effective and longer lasting.

But the walk on environment is far from complete. The push for solar and wind energy, gasification of the economy, EV ecosystem along with other technological solutions to cope with climate crisis are positive initiatives. But the record of the government in protecting forests, preserving biodiversity, conserving energy and incentivizing life style changes is dismal if not deeply disturbing. In fact, an urgent and radical shift is required from development centric to environment centric budget making before development is rendered meaningless in the face of environmental collapse.