– By Chinmay Joshi
The recently released World Economic Outlook (WEO) January 2024 update by the International Monetary Fund (IMF) painted an optimistic picture of global growth recovery. The global growth is projected to exhibit a marginal uptick from 3.1% in 2023 and 2024 to 3.2% in 2025. In the Indian context, however, the growth is predicted to exhibit a declining trend from 6.7% in 2023 to 6.5% in 2024 and 2025. Against this backdrop, the Union Finance Minister, Mrs. Nirmala Sitharaman presented her sixth consecutive union budget which was an interim budget on February 01, 2024. This was a vote-on-account giving the current government an authority to spend for a few months till the new government is elected for the 18th Lok Sabha.
The budget estimates (BE) of 2024-25 shows that the revenue receipts are expected to increase by 11.17% in 2024-25 over the revised estimates (RE) of 2023-24 especially due to the robust rise in tax and non-tax revenue. The budget expects significant rise in tax revenue (net to centre) by around 12% in 2024-25 over the RE of 2023-24 whereas the growth in non-tax revenue is expected to increase by 6.36% in the same period. Additionally, it is to be noted that the non-tax revenue rose significantly in RE of 2023-24 over the BE of 2023-24 by 24.57% largely due to dividends and profits.
The budgeted increase in the gross tax revenue is expected to come from the robust growth in corporation tax, income tax and the Goods and Services Tax (GST). However, the growth in direct taxes will be contingent upon generating more formal sector employment opportunities, widening of tax base, simplifying tax payment procedures among others. Similarly, the achievement of higher GST going ahead will significantly depend on the domestic consumption expenditure in the economy. In this context, it is important to note that as per the First Advance Estimates (FAE) of national income released by the MOSPI, NSO on January 5, 2024, the Private Final Consumption Expenditure (PFCE) is expected to decline from 7.52% in 2022-23 to 4.4% in 2023-24 on Y-o-Y basis in real terms along with the decline of PFCE share in the GDP from 58.5% in 2022-23 to 56.9% in 2023-24.
The non-tax revenue is expected to be boosted significantly by dividends and profits followed by other non-tax revenue. The dividends and profits are budgeted to rise by 64.83% in 2024-25 over the BE of 2023-24 in which significant contribution is expected to come from the dividends or surplus from the Reserve Bank of India (RBI), Nationalized Banks and Financial Institutions to the tune of Rs. 1,02,000 crores which will be an increase of 112.5% in 2024-25 over the BE of 2023-24. Also, it is important to note that the dividends or surplus from these institutions in the revised estimates (RE) of 2023-24 rose by 117.51% over the BE of 2023-24. This indicates that the dividends or surplus from the central bank and other banking and financial institutions have become a major source of non-tax revenue for the central government.
On the other hand, the capital receipts are expected to decline by 1.46% in 2024-25 over the RE of 2023-24. This can be attributed to significant reduction in the disinvestment proceeds. The disinvestment proceeds declined by 50.82% as per the RE of 2023-24 over the BE of 2023-24. In the upcoming year also, the target set out for disinvestment proceeds is significantly reduced by around 18% over the BE of 2023-24. The reduction in the revenue generated through disinvestment proceeds has a potential to impact the achievement of fiscal deficit target negatively going ahead. Besides, in 2024-25, the government aims to reduce the proportion of other receipts (including internal debts and public account) and external debt in financing the fiscal deficit.
In order to boost the economic growth, the government has resorted to increase the capital expenditure (CE) by 11% in BE of 2024-25 over the BE of 2023-24. However, it should be noted that there has been a marginal increase in CE in BE of 2024-25 of 3.39% of GDP as compared to 3.37% of GDP in BE of previous year. Furthermore, the decline in the CE in the RE of 2023-24 as compared to the BE of 2023-24 along with increase in the revenue expenditure in RE of 2023-24 as compared to the BE of 2023-24 implies more resources have been directed towards non-productive purposes rather than long term investments which are growth augmenting. Apart from that there is an absence of additional expansionary fiscal policy measures in this interim budget keeping in mind the challenges of elevated inflationary pressures in the economy.
Among the key deficit indicators, the fiscal deficit (FD) will gradually be reduced from 5.8% in 2023-24 to 5.1% in 2024-25. Similarly, the revenue deficit (RD) is also expected to come down to 2% in 2024-25 as a result of a more than proportional rise in the revenue receipts over the revenue expenditure. However, it is important to reduce the FD to 3% of GDP and achieve zero RD as stipulated in the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 and its subsequent amendments to ensure efficient fiscal management. In order to achieve the zero RD, either the revenue receipts must be increased substantially or revenue expenditure must be reduced. In this context, the government must find ways to increase revenue receipts as there are inherent limitations for the government to significantly reduce the revenue expenditure. However, the achievement of both these targets as elucidated in the FRBM Act has long remained elusive for the successive governments.
The global economic growth is still fragile despite showing some signs of recovery. Several downside risks emerge such as rising food and energy prices globally; adverse impacts of extreme weather conditions characterised by droughts, floods and El Niño phenomenon etc.; supply chain disruptions due to prolonging and widening of conflicts especially in the Gulf region, among others. In this pressing situation, it is necessary that the fiscal policy envisaged in the upcoming budget by the new government should strengthen the Indian economy to withstand the domestic as well as external shocks.
(Chinmay Joshi is the Research Associate, Finance and Economics at Bhavan’s SPJIMR, Mumbai.)
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