Union Budget FY2024-25 – A Balanced One on the Horizon?

What’s the Point?

On July 23, 2024, the Union Budget FY2024-25 will be announced. On one hand, there are expectations of a budget oriented towards growth with higher spending towards development of infrastructure and other capital expenditure initiatives, while on the other, there are also expectations of a “populist” budget. The broader consensus is that the Government could announce a balanced Budget boosting consumption and capital expenditure alike, while also treading the path of fiscal consolidation.

What is the “Balancing” act of the Budget?

A “populist” budget is a fiscal plan tailored to resonate with the general public by offering immediate benefits or addressing popular concerns through various measures. In India’s context, while this kind of budget could provide relief in the short term, the Government needs to continue its stance to prioritize growth along with fiscal prudence. Hence, the Union Budget could be more “balanced” through a combination of the following measures:

Higher Allocation to the Rural Spending and Agricultural sectors - Some key areas discussed below

• In agriculture and agri-related activities, while Minimum Support Price (MSP) has been instrumental in price discovery mechanism, benefitting ~1.6 crore farmers, there have been challenges innate to MSP mechanism.
• There is a pressing need for the removal of frictions in financing channels in the agri value chain, given the favourable trend being witnessed in the rural economy. The value creation could encompass end-to-end activities like farming, aggregating, grading/sorting, warehousing, value additions through processing and retailing, in particular on postproduction stage(s).
• While India’s rural economy derives its incomes largely from agriculture and has seen its consumption growth outpace urban growth (7.6% vs 5.7% [Nielsen: Q12024 (JFM2024)]: Rural consumption growth presents an opportunity!), rural economy is becoming less dependent on the farm sector. With a decrease in dependency, there is a need for an improvement in skilling and increasing access to technology.

*P: Provisional Estimates, **BE: Budgeted Estimates, $E: Expected Estimates by Ministry of Finance and Kotak Institutional Equities (KIE)

Higher Capital Expenditure Targets

While there has been a need to increase support to the demand side of the economy, the Government is expected to continue focus on the supply side of the economy by boosting growth through capital expenditure. In the Interim Budget 2024-25, the FY2025BE for capex already stands at ₹11.11 lakh crore – 16.9% higher than the FY2024 Revised Estimates. With strong Goods and Services Tax (GST) and direct tax collections along with Reserve Bank of India’s (RBI) transfer of ~₹2.11 lakh crore as surplus to the Central Government for FY2024, the FY2025BE for capex could possibly witness a further rise with a higher capex to railways, roads & highways and loans for capex to states versus the Provisional estimates for FY2025. This falls in line with previous Budget announcements under the current Government, when spending on capex increased even during election years.

*P: Provisional Estimates, **BE: Budgeted Estimates, $E: Expected Estimates by Ministry of Finance and Kotak Institutional Equities (KIE)

Continuing Fiscal Consolidation without shifting away from the existing Prudent Fiscal Policy Framework

The re-election of the existing government with lower majority raised the potential risk of deviation from fiscal consolidation path. But this initial anxiety subsided as the Government department allocation, quantum of MSP hikes announced and other measures, gave higher comfort on the likelihood of policy continuity. Furthermore, RBI’s transfer of surplus of ~₹2.11 lakh crore to the Government alongside a higher than budgeted dividend from Central Public Sector Enterprises (CPSEs) could result in a significant growth in non-tax revenue, which could aid the Government to stick to its fiscal consolidation path, and retain the budgeted fiscal deficit target of 5.1% for FY2025.

Conclusion

As per estimates by National Institute of Public Finance and Policy (NIPFP), the fiscal multiplier (change in GDP for every rupee spent by Government) for revenue expenditure is 0.99 and for infrastructure is 2.5 to 3.5. This implies that for every ₹1 spent for revenue expenditure, there is a ₹0.99 gain in GDP. While revenue expenditure plays a crucial role by allocating resources for social protection, enhancing human capital and activities for social welfare, the fiscal multiplier for infrastructure is much greater. Hence, a balanced Union Budget is needed for driving growth by improving critical infrastructure for benefiting trade and taking measures to address immediate social concerns.

Sources: Ministry of Finance, India Budget, KIE, SBI Research, NIPFP, and other publicly available information.

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