Expenditure control is the key to Budget’s fiscal mathematics
Budget 2024-25 shows how the government has kept a tight leash on its own expenditure. Total expenditure in 2024-25 at Rs 48.2 lakh crore is about 14.77 per cent of India’s gross domestic product (GDP). Year-on-year, this represents a rise of only 8.5 per cent over Rs 44.42 lakh crore in 2023-24. But as per cent of GDP, the total expenditure this year will be lower than 15 per cent last year. In other words, 2024-25 will see a real expenditure compression of about 0.23 per cent of GDP. Significantly, the extent of expenditure compression was visible more in the government’s revenue outlay. At Rs 37.1 lakh crore in 2024-25, revenue expenditure will rise by only 6 per cent, which in real terms is a negligible increase. And if you exclude interest payments of Rs 11.63 lakh crore, the revenue outlay will rise by only 4.8 per cent. As per cent of GDP, revenue expenditure will be 11.36 per cent in current year, lower than 11.82 per cent in 2023-24. Not surprisingly, revenue deficit will be brought down to 1.8 per cent of GDP, down from 2.6 per cent in 2023-24 and 4 per cent in 2022-23. Since capital expenditure has been rising steadily (up from 2.7 per cent of GDP in 2022-23 to 3.2 per cent in 2023-24 and now to 3.4 per cent in 2024-25), the real brunt of expenditure control has been faced by revenue expenditure. There has been an obvious improvement in the quality and mix of the government’s expenditure, but this has raised other issues on how key sectors have seen a decline in their outlays.
Outlay for defence & subsidies cut, no rise in flagship schemes
The effect of such expenditure restraint is showing in the outlay for various sectors. The government’s expenditure on defence has seen a small decline of about 0.3 per cent to Rs 6.22 lakh crore in 2024-25 and as per cent of GDP, it is down to just about 1.9 per cent, against 2.1 per cent last year. Major subsidies have been squeezed as the outlay for it this year, believe it or not, will decline by about 8 per cent to Rs 3.81 lakh crore, riding on lower procurement of wheat and fertiliser price rationalisation. There is no increase in the allocations for the government’s flagship schemes like the PM Kisan (where the annual transfer of Rs 6,000 to farmers, set in 2019, must have declined substantially in real terms) and the Mahatma Gandhi National Rural Employment Guarantee Scheme. Agricultural research too got no significant increase in allocations, although education got a 15 per cent increase, helped as it was by transfer of resources from reserve funds in the public account, and health schemes saw a 13 per cent rise in outlay. Urban housing schemes have got a decent increase in allocations as part of the government’s plan to provide more affordable housing.
Robust fiscal consolidation plan, riding on RBI dividend
Of course, such expenditure containment has resulted in the government’s fiscal deficit coming down steadily every year from the high of 9.2 per cent of GDP in the Covid year of 2020-21. In the following years, fiscal deficit was down to 6.7 per cent in 2021-22, 6.4 per cent in 2022-23 and to 5.6 per cent in 2023-24. And now, the fiscal deficit target for the current year is set at 4.9 per cent of GDP. Note that this reduction in deficit has been achieved by raising the Centre’s net revenue and non-debt capital receipt from 9.4 per cent of GDP last year to 9.7 per cent in 2024-25 and by reducing expenditure from 15 per cent to 14.7 per cent of GDP in the same period. The government’s revenue has of course benefitted not just from higher tax collections but also from a huge increase in the dividend from the Reserve Bank of India estimated to Rs 2.1 lakh crore.
Policy shift to use debt as the anchor for fiscal consolidation
Yet, the Union government’s debt is moving down at a slow pace. From a high of about 63 per cent of GDP in the Covid year of 2020-21, it came down to 58.2 per cent in 2023-24 and is now set to reach 56.8 per cent of GDP in 2024-25. While this is coming down, this level of debt will still be way higher than the target of 40 per cent of GDP, set by an official committee a few years ago. The slow reduction in the debt level is a function of the past sins of maintaining high deficit levels. Consequently, almost 72 per cent of the total borrowing to be incurred in 2024-25 will be used up in interest payments, up from 64 per cent last year, posing challenges for the government’s non-obligatory spending. In 2022-23, only about 53 per cent of borrowing was used up for interest payments and a year earlier it was even less at 37 per cent. Clearly, maintaining a higher deficit has led to higher interest payments and constrained the government’s spending freedom. Therefore, Ms Sitharaman’s policy announcement in this Budget that from 2026-27 onwards, the government will not just look at the fiscal deficit number, but also remain focused on how it could bring down its debt level at a faster and sustainable pace. This is a welcome move as the government intends to bring out a new fiscal consolidation law to provide the new benchmarks.
Despite buoyancy, tax revenue numbers are conservative
The expenditure challenges for the government implied that the Budget had to raise more revenues. But on the tax revenue front, the Budget for 2024-25 has been conservative in its estimates. Last year, on a nominal economic growth of 9.6 per cent, gross tax revenues rose by 13.46 per cent, implying a tax revenue buoyancy of 1.4. In 2024-25, tax revenue collections are growing at a decent pace, if the first quarter of the current year is any indication. Yet, the Budget projects a gross tax revenue growth of 10.8 per cent on a nominal GDP growth estimate of 10.5 per cent, implying a much lower tax revenue buoyancy of 1.02. Clearly, tax revenue targets in this year’s Budget indicate that there is a revenue cushion implicit in these numbers. If there are no major slippages in expenditure, the higher tax revenue numbers could mean a further reduction in the fiscal deficit. Remember that only about eight months are left to meet the capex target set for the current year. The capital expenditure pace in the last four months has been relatively slow because of the elections. Therefore, it is possible that the Centre may not be able to meet its entire capex target this year. The question that will be raised is whether Budget 2024-25 will once again surprise with a lower fiscal deficit at the end of the year, like 2023-24, or whether the government’s conservative approach to revenue estimates has denied it an opportunity to go in for higher expenditure to boost demand.
FM bites the bullet on capital gains taxation restructuring
On the tax revenue front, Ms Sitharaman has bitten the bullet on the question of restructuring the capital gains taxes on financial and non-financial assets. Few finance ministers have shown the courage to reform the capital gains taxation system for fear of rattling the stock market. But Ms Sitharaman has taken the risk and her capital gains tax changes have seen the stock markets reporting losses, but a major reform has been achieved. All financial assets and non-financial assets (including real estate) will now be paying a higher long-term capital gains tax of 12.5 per cent with no inflation-indexation benefit. Earlier, this tax on most financial assets was 10 per cent. The limit of exemption of capital gains tax on financial assets has been raised from Rs 1 lakh to Rs 1.25 lakh. Short-term capital gains from financial assets will be taxed at 20 per cent, instead of 15 per cent earlier. The holding period to define long-term capital gains has been set at more than 12 months for listed financial assets and 24 months for unlisted financial assets and all non-financial assets. These changes would fetch an additional Rs 15,000 crore for the exchequer. In addition, the securities transaction tax on futures and options has been raised as the government saw increased interest among retail investors to tap these instruments. For reasons of equity, the finance minister decided to tax income received on buy back of shares in the hands of the recipient. In a boost to the start-ups ecosystem, the Budget abolished the 30 per cent angel tax levied on investments made in start-up companies, introduced a simpler tax regime for foreign shipping companies operating domestic cruises in the country, reduced the corporation tax rate on foreign companies from 40 per cent to 35 per cent, withdrew the equalization levy of 2 per cent on technology companies like Google and simplified the system of tax deduction at source and tax collected at source.
Marginal relief for personal income tax payers
Personal income tax rates too were changed by the finance minister to attract more taxpayers opt for the new income-tax regime. Already, about two-thirds of individual income-taxpayers are paying their taxes under the new taxation regime. To incentivize such a switch-over at a faster pace, Ms Sitharaman announced an increase in the amount of standard deduction allowed under the new income-tax regime from Rs 50,000 in a year to Rs 75,000. Similarly, deduction on family pension for pensioners was enhanced from Rs 15,000 to Rs 25,000. Both the moves were expected to benefit over 40 million salaried individuals and pensioners. In addition, the tax slabs were modified by reducing the tax rates in a couple of slabs, which was expected to benefit salaried employees to the tune of Rs 17,500 in a year.
Customs tariff cuts and a comprehensive review raise hopes
On Customs duty, the finance minister decided to cut tariffs on over 50 items in a dozen sectors on the ground that domestic manufacture of these items had either stabilized after enjoying the protection given to them in the last few years or they needed to access such goods to become more competitive in the export market. This was a surprise move. What’s more, Ms Sitharaman announced that she would undertake a comprehensive review of the Customs rate structure over the next six months to rationalize and simplify it for ease of trade, removal of duty inversion and reduction of disputes. Some of the items that saw their import tariffs reduced were mobile phones, shrimp feed, specified critical minerals, gold, silver, ferro-nickel, ferrous scrap, blister copper, capital goods for manufacture of solar cells and modules, certain raw materials for textile and leather sectors, components and consumables for manufacturing shipping vessels and certain types of medical equipment. About half a dozen items like ammonium nitrate, solar glass for manufacture of solar cells also saw their import duty going up.
Disappointing approach to disinvestment and privatization
The Budget for 2024-25 was a disappointment as far as the government’s strategy for mobilizing non-tax revenues was concerned. Disinvestment of government shares in public sector undertakings (PSU) or privatization found no mention in the Budget speech or other Budget documents. An estimated Rs 50,000 crore was to be mobilised this year under the head of other capital receipts, which can be interpreted as some sale of PSU shares and monetization of assets. Last year, only about Rs 30,000 crore was mobilised under this head. This Budget once again indicated that the government’s approach to PSUs has undergone a subtle change. It is more interested in earning dividends from PSUs by ensuring that they perform better, rather than preparing for either privatization or disinvestment. Value creation in PSUs is the new focus, rather than selling them off.
Four long-term promises on reforms of policy and taxation
There are four Budget announcements that suggest a policy framework that could help government finances as also the growth impulses in the economy. The finance minister announced the formulation of an economic policy framework to delineate the government’s approach to economic development and outline the scope of the next generation of reforms to facilitate employment opportunities and sustain high growth. The proposed framework will help initiate reforms to improve productivity of factors of production (land, labour and capital) and facilitate markets and industrial sectors to become more efficient. More interestingly, the framework will be formulated in collaboration between the Centre and the states by building consensus on the proposed reforms. Two, there is a promise of a comprehensive review of the income-tax act to make this law concise, lucid and easy to understand, with the objective of reducing disputes and providing tax certainty to taxpayers. This review is expected to be completed in six months. Three, the finance minister indicated that a modified New Pension Scheme, which had come under fire from trade unions and some state governments, was expected to be rolled out soon. The proposed NPS after modification was expected to address the concerns of employees while maintaining fiscal prudence. And four, the agriculture budget has laid less emphasis on cereals and more on fisheries and animal husbandry by increasing outlays for these two farming sectors with the potential of growth and higher exports.
Coalition compulsions behind Bihar & Andhra package
For an evaluation of the first Budget of the Modi government in its third term, the political context of the exercise can hardly be ignored. What Finance Minister Nirmala Sitharaman presented to Parliament on July 23 was the first Budget of a Modi government, in which the ruling Bharatiya Janata Party did not have a majority on its own but had to rely on support of two coalition partners – the Telugu Desam Party (TDP) and the Janata Dal United (JDU). Since TDP under Chandrababu Naidu and JDU under Nitish Kumar are running governments in Andhra Pradesh and Bihar, respectively, the 2024-25 Budget was politically obliged to do a good turn to these two states. Thus, the Budget has plenty of schemes and projects aimed at benefitting these two states. She unveiled Purvodaya, a plan for all-round development of the eastern region of the country focusing on human resource development, infrastructure and generation of economic opportunities. Purvodaya will cover the states of Bihar and Andhra Pradesh, apart from Jharkhand, West Bengal and Odisha. Gaya in Bihar will see the development of an industrial node as part of the Amritsar-Kolkata industrial corridor project. In addition, Bihar will have four new road projects at an estimated cost of Rs 26,000 crore, new power projects at an estimated cost Rs 21,400 crore, new airports, medical colleges and sports infrastructure. For Andhra Pradesh, an amount of Rs 15,000 crore has been arranged, along with help from multilateral development agencies, to help it build its new state capital. Assistance to Andhra Pradesh to help it complete the construction of the Polavaram irrigation project to help farmers in the state and improve national food security, construction of infrastructure in the areas of power, railways, roads and water and grants for the backward regions of Rayalaseema, Prakasam and north coastal Andhra are among the other projects which have received support from the Budget. From a fiscal point of view, however, the silver lining is that not much of these additional project outlays will have a direct impact on the Union government’s budgetary resources in the current year as the expenditure will be staggered over the next few years and some of it would be coming from domestic or international financial institutions.
A big push for jobs, internship scheme for private sector
The economic context of the 2024-25 Budget is no less important. The rising stress level in micro, small and medium enterprises (MSMEs), the growing concern over creating new jobs, the clamour for more affordable housing and the demand for skilling and reskilling were issues that the finance minister could not afford to ignore. These were economic policy concerns which also had electoral implications for the ruling party.
Thus, Ms Sitharaman unveiled an ambitious package of three employment-linked incentive schemes, based on enrolment in the Employees Provident Fund Organisation (EPFO) and a focus on recognizing first-time employees and support to both employees and employers. One month’s salary of up to Rs 15,000 to first-time EPFO-registered employees (benefitting an estimated 21 million youths), incentives for additional jobs in manufacturing companies with regard to the new employees’ EPFO contribution in the first four years of employment (expected to benefit 3 million youths) and reimbursement of up to Rs 3,000 per month to employers for two years towards their EPFO contribution for each additional employee (expected to incentivize employment of 5 million persons) were the other ambitious schemes announced by Ms Sitharaman. Apart from these, she promised construction of creches and working women’s hostels in partnership with industry to encourage greater participation of women in the workforce, skilling of over 2 million youths over a five-year period in collaboration with states and industry, upgrading 1,000 industrial training institutes, loans of up to Rs 7.5 lakh to students for their skilling programmes and financial support of up to Rs 10 lakh for higher education in domestic institutions. The most ambitious announcement was the launch of a comprehensive scheme where top 500 companies could volunteer to provide one-year long internship opportunities to 10 million youths in five years. An internship allowance of Rs 5,000 per month along with a one-time assistance of Rs 6,000 will be provided by the government, while companies will be expected to bear the training cost, of which 10 per cent could be met through their Corporate Social Responsibility (CSR) funds.
MSMEs get more loans and regulatory forbearance
For the MSMEs sector, the Budget announced several schemes. These included a credit guarantee scheme for MSMEs, by pooling their credit risks, to help them buy machinery equipment without collateral or third-party guarantee. A self-financing guarantee fund will be set up to provide them guarantee cover of up to Rs 100 crore (which would imply that the loan amounts could be higher) and the borrowing MSME will have to provide an upfront guarantee fee and annual guarantee fee. An enhancement in the limit of Mudra loans under the Tarun category from Rs 10 lakh to Rs 20 lakh for those which have repaid their past loans, a reduction in the turnover threshold from Rs 500 crore to Rs 250 crore to facilitate more MSMEs to join the TReDS platform and unlock their working capital by converting their receivables into cash (an estimated 7,000 MSMEs and 22 central public sector units are expected to benefit from this move) and opening of 24 new branches of the Small Industries Development Bank of India (SIDBI) in the current year to extend their coverage to 168 out of the 242 major MSME clusters in the current year and more new branches to cover all the remaining clusters in the next three years are among the other initiatives that the finance minister announced. A potentially problematic scheme that she announced was a new mechanism to facilitate continuation of bank credit to MSMEs during their stress period. If their loans show up in the Special Mention Account (SMA) stage (an early sign of their loan becoming sticky or non-performing) for reasons beyond their control, their credit availability will be supported through a guarantee from a government-promoted fund. This is expected to help MSMEs continue to get credit for their business and to avoid their loans becoming non-performing assets or NPAs. This facilitates a type of regulatory forbearance, which can potentially interfere with prudential management of loans by banks.
A 36 per cent increase in outlay for urban housing
On urban housing, the finance minister announced that the PM Awas Yojana (PMAY) Urban 2.0 will invest about Rs 10 lakh crore over the next five years to address the housing needs of about 10 million urban poor and middle-class families. The total package will include central assistance of Rs 2.2 lakh crore in the next five years and there will be interest subsidy to facilitate loans at affordable rates for the beneficiaries. Not surprisingly, the provision for PMAY-Urban has gone up by 36 per cent in 2024-25 to Rs 30,171 crore, compared to Rs 22,103 crore in 2023-24. Along with this, the Atal Mission for Rejuvenation and Urban Transformation has also seen a 54 per cent increase in its allocation to Rs 8,000 crore in 2024-25.
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