In its last full Budget before the general elections a little over a year away, the Narendra Modi 2.0 government displayed courage by eschewing populism and kept on top of macroeconomic stability, in the face of external headwinds. Finance minister Nirmala Sitharaman clung to the ideas of high-quality fiscal correction and a durable, investment-led, “green” growth with a decisive thrust on digital infrastructure, as she presented the Budget for FY24 in Parliament on Wednesday.
The Budget, therefore, lacked any meaningful consumption booster. Despite a rejig of the exemption-free personal income tax regime, its adoption by large sections of taxpayers is still doubtful. A cut in the highest surcharge on income tax may provide a modicum of support to consumption, which is seen to be very weak, in the second half of this fiscal, if not beyond.
The fiscal deficit target for the next fiscal has been cut to 5.9% of GDP, against 6.4% in FY23. The minister also reaffirmed her resolve to bring down the gap to below 4.5% by FY26. The deficit target for next year is contingent on an assumed tax buoyancy of 1, higher than 0.8 this year. This looks difficult, given the likely slowdown in economic growth.
A gross market borrowing of Rs 15.43 trillion is planned for FY24, compared with the revised estimate of Rs 14.21 trillion for FY23. This being less than expected will cool the bond markets —the benchmark 10-year G-sec yield eased to 7.28% on Wednesday from 7.34% on Tuesday. BSE benchmark Sensex closed 0.27% higher on Wednesday after it trimmed most of the intra-day gains. During the day, it had climbed 2%.
Moody’s Investors Service said despite the Budget’s fiscal consolidation effort, “high debt burden and weak debt affordability remain key constraints that offset India’s fundamental strengths”. Interest payments are projected to be a worrisome 46.3% of the Centre’s net tax receipts in FY24, though lower than 48.3% in the pandemic-hit FY21.
The proposed fiscal consolidation is indeed superior, as it involves a sharper cut in the revenue deficit from an upwardly revised 4.1% this fiscal to 2.9% next fiscal.
The revenue deficit is projected to be 48.7% of the fiscal deficit in FY24, much lower than the precarious 79.7% reached in FY21. The Budget size for the next fiscal is estimated to be modest at Rs 45.3 trillion as it involves annual growth of just 7.4%, which is barely 3% in real terms. This is lower than the trend in recent years, when the government had to scale up spending to give relief to the people during the pandemic and keep growth from falling precipitously. Capital expenditure is still estimated at a robust 3.3% of the gross domestic product (GDP) or Rs 10 trillion, compared with 1.7% in FY20, the year before the pandemic.The estimate of a sharp 28% decline in explicit subsidies to Rs 3.72 trillion is susceptible to the geopolitical vicissitudes.
Fertiliser and food subsidies, which turned out to be a neat Rs 2 trillion or 64% higher than the Budget Estimate (BE) in the current year, could become volatile again – the subsidy on soil nutrients have a big import content.
The real GDP growth in FY24 may be lower than even the conservatively assumed 5.5-6% (nominal GDP expansion of 10.5%) as the Centre may be forced to cut back on the estimated capital spending. It will likely come under pressure for counter-cyclical spending, during the electioneering for key state assembly polls in 2003 and ahead of the general elections in April-May, 2024.Sitharaman set out seven priorities for the F24 Budget, with the broader objective of realising all-round prosperity to the country and its people, as envisioned by the prime minister for the 25-year Amrit Kaal to 2047, the 100th year of Independence.
These are “Inclusive Development, Reaching the last mile, Infrastructure and Investment, Unleashing the Potential, Green Growth, Youth Power and Financial Sector.” “Our vision for the Amrit Kaal includes technology-driven and knowledge-based economy with strong public finances, and a robust financial sector.. ,” the minister said, adding that the economic agenda for Amrit Kaal would include creating “ample opportunities for citizens, especially the youth and (providing) strong impetus to growth and job creation…” The statement comes amid a recent spurt in unemployment rate and rising inequality in the country.While lofty objectives are set and fiscal consolidation is earnestly attempted at, the economy has just about recaptured the pre-pandemic level and lacks enough productive power to expand at higher rates.
The impending mild-to-moderate recession in the US and parts of Europe could hit aggregate demand further in the short term, requiring it to draw growth impulses almost entirely from domestic sources, while weathering a multitude of external-sector challenges. Outlays have been hiked substantially for the railways (Rs 2.4 trillion in FY24 against Rs 1.59 trillion in FY23), and the NHAI (Rs 1.63 trillion against Rs 1.42 trillion). States will get 50-year soft loan of Rs 1.3 trillion in FY24, as against Rs 76,000 crore in FY23, with the condition that they spend it the next fiscal itself and subject to a few other reforms riders, including those related to urban planning. The states’ fiscal deficit (borrowing) limit has been fixed at 3.5%, with 0.5% tied to power sector reforms.
The revised estimate (RE) of overall transfers to the states in FY23 is, however, almost the same as the BE at Rs 17 trillion, despite a 12.3% growth in the Centre’s gross tax receipts, as transfers under various central schemes to them have been regulated. The transfers are estimated to rise to `18.6 trillion in FY24, but this estimate may undergo a significant downward revision.A new private capex cycle is yet to gather pace. Given the decline in corporate profits in the gross value added (GVA) in recent quarters and the export slump, a big investment drive by Corporate India may take longer to materialise.
The capacity of states to complement the Centre’s capex drive is doubtful too; in April-October this fiscal, the states’ capex growth was nearly flat. The general government capex (Centre and states) accounts for barely 12% of the gross fixed formation in the economy.The Budget has given an explicit thrust to transition to green energy, in keeping with the government’s commitment to reduce emission intensity of the GDP and achieve net-zero by 2070. A clutch of measures announced with this intent include a Rs 35,000 crore fund for energy transition, and customs duty waiver for EV batteries.
The Budget did not raise the customs tariffs on more items or extended the production-linked incentives to more sectors, in what is seen as welcome departure from the protectionist tendencies the government had displayed earlier.Disinvestment target for next fiscal is a modest Rs 51,000 crore as against a revised Rs 50,000 crore for the current fiscal. The estimated revenue giveaway of Rs 35,000 crore due to tax reliefs will hinge on whether the high-income taxpayers find the concessional regime palatable after the sweeteners; tax experts are keeping their fingers crossed on this.
Prime Minister Narendra Modi said the Budget would provide “a foundation to fulfill the resolve for a developed India,” “The Budget gives priority to the deprived and will fulfil the dreams of the aspirational society, farmers, and the middle class,” he said.Former finance minister P Chidambaram said: “Who has benefited by this Budget? Certainly, not the poor. Not the youth looking desperately for jobs. Not those who have been laid off. Not the bulk of the taxpayers. Not the homemaker. Not the thinking Indians who are shocked by the growing inequality, the rise of the number of billionaires and the wealth being accumulated in the hands of the 1% of the population. Certainly, not you.”