The Union budget is the most important event in the financial calendar which sees intense speculation regarding the government’s expenditure, fiscal deficit as well as personal taxation.
Every year, it is a tightrope walk between limited resources and the ever-increasing need for expenditure.
Finance Minister Nirmala Sitharaman will present the interim budget on February 1, 2024, as this is an election year. The full budget for the financial year 2024-25 is expected to be presented by the new government in July after the Lok Sabha elections.
The ground reality is that the budget isn’t a festival of bumper dhamaka offers. It is more like an annual conference in which the CFO of a company gives an account of the finances. Transparency and credibility are key.
For those of us who find the budget clamour too disorienting, here are some key things to look out for.
Revenue
The budget has three parts on the revenue side -- tax revenue, non-tax revenue, such as dividends and interests, and disinvestments.
To understand if the tax revenue estimates are plausible, you need to read it against the nominal GDP numbers.
Nominal GDP is the total value of all goods and services produced in a given period, usually quarterly or annually. Real GDP is nominal GDP adjusted for inflation. Real GDP is used to measure the actual growth of production without any distorting effects from inflation.
Nominal GDP growth could be around 8.9 percent in FY24. From this, you approximate the nominal GDP for the fiscal and then calculate what would be the tax revenue – usually around 10-11 percent of the nominal GDP, since India’s tax-to-GDP ratio roughly is in that range.
Mostly, income tax, corporate tax and GST grow at similar rates, unless the government expects GST to be much higher. The government could expect higher GST collection, if it is considering raising tax rates or expects a significant jump in compliance. It could expect lower GST collections, if it is exempting certain categories from this tax.
Similarly, the government’s projections of the excise-duty collections can tell you about its assessment of the global oil price situation and the taxes it wishes to charge.
For example, projections could be higher if it is expecting global oil prices to go up or if the government wants to raise taxes. Technically, its projections of excise-duty collections could also be higher if it is expecting a higher oil demand, but this is unlikely, given that oil demand is inelastic.
The finance minister, in the Union budget 2023-24, pegged the gross tax revenue at about Rs 33.61 lakh crore, with an implied tax-GDP ratio of 11.1 percent.
Indirect tax collection was estimated at Rs 15.37 lakh crore in the budget estimate of FY24. Direct taxes, comprising corporation tax and income tax, were estimated at Rs 18.24 lakh crore for FY 2023-24.
In FY23, the Centre’s gross tax revenue stood at Rs 30.43 lakh crore, of which direct tax revenue was Rs 14.2 lakh crore. Additionally, non-tax revenue, which includes dividends from RBI and public sector institutions, stood at Rs 2.86 lakh crore in FY23.
Another component is disinvestment, which refers to the strategic selling or liquidation of government-owned assets, usually in the form of shares in state-owned companies and other assets. It is a crucial aspect of fiscal policy.
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In FY23, disinvestment receipts reached Rs 35,293 crore, which was 54 percent of the targeted Rs 65,000 crore.
The Union budget for FY 2023-24 had set a disinvestment target of Rs 51,000 crore. However, the government has realised only Rs 10,051 crore so far.
Where is the money going?
These are the numbers that usually make the headlines. This is because the overall expenditure numbers are seen as an impetus to the economy. The total expenditure in 2023-24 is estimated at Rs 45.03 lakh crore.
But, more than this headline, you need to pay closer attention to how it will be split -- that is, how much would be revenue expenditure and how much would be capital expenditure?
Revenue expenditure is what groceries and utilities are to the households. They are a must, like how you cannot do without rice/wheat and electricity. In FY24, revenue expenditure is estimated at Rs 35 lakh crore.
Given that this is an election year, keep an eye out for extravagant, populist schemes. Social-sector expenditure increased to Rs 21.3 lakh crore in FY23 (BE) from Rs. 9.1 lakh crore in FY16.
Now comes capital expenditure.
It is like spending money on value-generating assets for the longer term, like an individual buying a washing machine or a vacuum cleaner. The government’s capex is meant for building roads, railways, ports and so on. It has a higher growth multiplier because it helps to build durable assets and create jobs in the economy.
The government’s capex is what has kept the economy going in the past decade because private investments have been subdued. Recently, the capex push and allocation from the Centre have gone up and now it stands at Rs 10 lakh crore (BE 2023-24).
What is fiscal deficit?
Literally, every Union budget is a fine balancing act and the magic of it is revealed in the fiscal-deficit number.
There’s no right or wrong figure. Its rightness depends on the domestic need and global scenario.
As a key metric, in a government's budget speech, fiscal deficit represents the gap between the government's income and expenditure. It also indicates the total amount that the government needs to borrow to cover its expenses. Persistent and elevated fiscal deficits can give rise to apprehensions regarding a government's capacity to fulfil its financial commitments without relying heavily on borrowings.
The government has set a fiscal deficit target of 5.9 percent of the GDP for financial year 2023-24.
India has been financing a chunk of its deficit through domestic market borrowings and small savings funds. It could also raise money internationally through specific bonds, though India hasn’t ventured into that direction yet. This is because, while international borrowing could be cheap, increasing foreign currency debt creates exchange-rate risk. After the Balance of Payments crisis of 1991, India has adopted a rather conservative stance on foreign borrowings.
The key questions will then be if there will be enough demand for government borrowings and if the government will be able to raise the money it needs. Whatever be the answer, if the government’s borrowing plan is transparent and appears to meet the financing need, it should be hugely comforting.
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