Budget 2024 throws up positive surprise

Synopsis

In terms of priorities, the interim budget has continued its focus on raising capital expenditure – the type of expenditure which creates assets (think railways, roads, housing) – at a faster pace compared to revenue expenditure (which is essentially spent on salaries, interest payments, pensions, etc). This strategy has been adopted since the pandemic as the government introduced supply-side reforms to support growth by building economic infrastructure. Since FY21, capex has grown close to 30% on average per annum, compared to 11% growth in revenue expenditure.

Meeting 5.9% Fiscal Deficit Target May Get a Tad Tougher
Interim budget toes the fiscal consolidation line as it continues with the strategy of supporting medium-term growth through higher capex spend

Expectations over the interim budget 2024 were generally muted as it was not a full budget, and would undergo a revision in July. We, too, broadly expected the interim budget to toe the fiscal consolidation line set out in earlier exercises, and continue with its strategy of supporting medium-term growth through higher capex spend. The interim budget delivered on all of these, but also sprung a few surprises, which made the bond markets happy.

The biggest surprise to us (and markets) was the ambitious target of reduction in fiscal deficit for next year. The central government expects the fiscal deficit at 5.1% of GDP next year, from a downwardly revised 5.8% of GDP this year. This comes on the back of a muted increase in budgeted revenue expenditure. It expects to lower the fiscal deficit further to 4.5% by FY26. A reduced fiscal deficit matters, as it signals the government’s intentions to lower its dependency on borrowing to finance its expenses, which in turn lowers its interest payment burden in the long term.

The budget is essentially an accounting exercise, wherein the government presents its income and expenditure streams for the past year, and projects the same for the next year. In India, however, it is covered with much interest, as it also gives a glimpse of spending priorities of the government, and the status of its financial health.

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In terms of priorities, the interim budget has continued its focus on raising capital expenditure – the type of expenditure which creates assets (think railways, roads, housing) – at a faster pace compared to revenue expenditure (which is essentially spent on salaries, interest payments, pensions, etc). This strategy has been adopted since the pandemic as the government introduced supply-side reforms to support growth by building economic infrastructure. Since FY21, capex has grown close to 30% on average per annum, compared to 11% growth in revenue expenditure.

Looking at financial health, the interim budget outlined the government’s continued commitment to fiscal consolidation in reducing the fiscal deficit. The lower borrowing requirement for next year is essentially to allow private capex to step up and thereby crowd in investment. The finance minister said as much in her speech, “…the lower borrowings by the central government will facilitate larger availability of credit for the private sector”. The lowering of fiscal deficit is coming on the back of reduction in revenue deficit, i.e. increasingly, the government’s current expenses are being paid off by its own receipts, rather than through borrowing. Indeed, the revenue deficit as a percentage of GDP is budgeted in FY25 to be the lowest since FY08, indicating improved health of government finances.

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Another keenly watched feature of the interim budget is its announcements on the tax architecture. This time, the finance minister did not announce any rationalisation or changes to either the direct or indirect taxes, indicating predictability in the regime. It also suggests the government’s growing comfort with garnering revenues through improved compliance and widening tax base, without resorting to changes in tax rates themselves. That said, we think the projections for revenues are a tad conservative: in case the current economic growth momentum holds up into next year, there is a possibility of overshooting on its budget estimates.

Also Read: Capex, fiscal deficit & more; here’s a look at all the key numbers you need to know

Overall, the interim budget steered clear of undertaking significant populist measures despite impending elections, while still increasing capex and reducing its borrowing. The proof of the pudding will be in how the government manages this, while still maintaining its strong track record of fiscal marksmanship going ahead. This will be more clear in the final budget by the new government after the elections.

(The authour is MD, Barclays)

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(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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Harry Byrne

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