The interim budget turned out to be what it promised, an interim budget. It has some very interesting data about the state of the economy. Both corporate tax and income tax are showing an increase compared to the budget estimates. However, we are seeing non-tax revenues go up because of increased dividends from RBI and public sector companies.
Overall, the revenue receipts seem to be higher and are in good shape. On the expenditure side too, the government is meeting its capital expenditure commitments and the expenditure has gone up a little bit because of enhanced subsidies. The most interesting aspect is the fiscal deficit is being contained at 5.8 percent as against 5.9 percent in the original budget with lesser borrowing than budgeted.
The quality of expenditure is certainly improving year by year. And capital expenditure as committed is going up. In my view, the tax figures are somewhat underestimated compared to what could happen and we could see an increase in tax collections after the final figures come in April. The reason is that corporate tax is going up, as corporate profits are at an all-time high and individual taxes have gone up by 20 plus percent till January 7.
And there is every possibility that the gross tax collection will increase compared to the budget. Even in the last year, gross tax collection was higher than the revised budget and the government could be underestimating the collection for the next year as well. For budget FY 24-25, the government has estimated an increase in nominal GDP at 10.5 percent and in the current year it could be around 9 percent because of certain changes in the WPI inflation figures.
The tax collection showed robust economic growth and job creation. Payment of income tax and corporate tax is directly linked to an increase in taxpayers' income and also in corporate profits. For FY 23, corporate tax collection gross was Rs 10.04 lakh crore. Assuming a tax rate of 25 percent, the pre-tax profit was around Rs 40 lakh crore, approximately 15 percent of the GDP of Rs 272 lakh crore. And this year in FY 24, profits are higher than the previous year.
The higher tax collections show high economic growth, which we are seeing, along with job creation. The EPFO data shows an increase in formal sector job creation all over. So, all talks of a K-shaped recovery is not borne out by any facts. The Budget 24-25 is again focused on economic growth of 10.5 percent, and robust tax collection to match the economic growth, and reasonable expenditure, except that capex is going up by 11 percent to Rs 11.1 lakh crore. So the focus on capital expenditure increasing year by year is going to show great dividends for the Indian economy.
Fiscal deficit for next year is a big surprise, being contained at 5.1 percent, a drop of 0.7 percent of GDP with absolute borrowing being lesser in FY 25 than in FY 24. With the government borrowing less from the market, interest rates are expected to come down and there will be greater availability of capital for private sector investment. With the change in the bond indices and India being included in the global bond indices, there will be greater demand for government securities which could lead to a decline in interest rates of government the next year, which is a highly positive step.
Therefore the targeted decline of 5.1 percent in fiscal deficit shows that the government is firmly on the path for fiscal consolidation with a targeted reduction in fiscal deficit to 4.6 percent in FY 26. All in all, the interim budget demonstrated the strength of the Indian economy. There are no big bang announcements, and no tax deductions, except some minor ones for customs. There are few new policy directions, with a focus on building on the policies of the past.
An interesting announcement was a figure of Rs 1 lakh crore allocation for a 50-year loan at nil interest rate for the private sector to improve research. However, one can be sceptical about this as no details are available and the earlier promise of Rs 50,000 crore for the National Research Foundation as part of the new education policy is yet to see daylight. Government should concentrate on funding the announcement they made in earlier years fully, as the lack of any increase in research for universities is a big dampening factor.
Overall the interim budget remains an interim budget but demonstrates a very strong economy, showing promise of high growth in the future and large job creation.
Mohandas Pai is Chairman, Aarin Capital Partners. Views are personal, and do not represent the stand of this publication.
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