How much extra money FM Sitharaman has and where she can spend it in Budget 2024

Direct tax collection from April to July 11 showed a growth of 20% to Rs 5.75 lakh crore.

Even as investors may be nervous about whether Finance Minister Nirmala Sitharaman will announce a populist budget that will spoil the stock market party, the concern seems rather unfounded when looking at the big numbers.

One big bounty that the government received this year, which was unexpected, was the Rs 2.1 lakh crore (0.6 percent of the GDP) dividend from the central bank. In contrast, the government had budgeted only Rs 80,000 crore from the RBI in its interim budget. This means the government has excess cash of Rs 1.3 lakh crore (0.4 percent of the GDP) from this one source alone. Besides, if the tax collection for FY25 mirrors the trend of the past, net tax collections for the year may be underestimated by Rs 1.3 lakh crore. The first quarter numbers support the view that the finance minister may have underestimated tax collections for FY25 in the interim budget.

Follow our live blog for the latest on the Union Budget 2024

Direct tax collection from April to July 11 showed a growth of 20% to Rs 5.75 lakh crore. Net corporate tax was up 12%, and net income tax was up 21%. There isn’t yet any sign of fatigue in the economy (or the pace of formalization). So, compared to the estimated 12% hike in tax collections by the FM in the interim budget, it could well end up at a much higher number.

These two big numbers together will mean an extra spending power of nearly Rs 2.6 lakh crore in the hands of the finance minister. With that leeway, there is hardly any tightrope walking to do for Sitharaman, as a look at the spending pattern of the past shows.

The total capex spend for last year, the number investors care for the most currently, stood at Rs 11.1 lakh crore. This meant a 17% rise over the Rs 9.5 lakh crore revised estimate for FY24 and 11% higher compared to the FY24BE. Now, barring FY22, when the total capex went up 38%, year-on-year capex growth has been under 30%. In any case, the finance minister has been trying to temper expectations for a while now, stating that the government has done its bit in terms of heavy lifting, and now the private sector must step up its investment spending. A 30% growth in capex (meaning taking it higher from the interim budget estimate of 17% growth to 30%) will entail an additional spend of Rs 1.2 lakh crore. If the FM settled for a 25% growth, which investors should be fairly happy about, it will require an additional spend of Rs 80,000 crore (0.24 percent of the GDP).

Strip this off from the excess cash, and you still have Rs 1.4 lakh crore on the table to use as the FM wishes.

The above calculations do not account for any possible positive surprise on nominal GDP growth, which may also provide the government with some cushion. An MC poll of 16 economists pegged the nominal growth at 11 percent of the GDP, up from 10.5 percent in the interim budget.

At current levels, 10 basis points amount to roughly Rs 32,000 crore in terms of fiscal deficit. If you move nothing else, the FM could bring down the deficit by nearly 50-60 basis points after meeting the capex growth requirement.

The trade-off this time, therefore, is whether to prioritize fiscal consolidation or perk up consumption spending. The argument in favour of fiscal consolidation is that the RBI dividend is a one-time bounty that may not recur, and as we move forward, the benefits of formalization and tax accruals on account of this change will start to peter off at some stage. Instead of putting this off for another day, seizing the opportunity and fixing it immediately could have benefits like a potential upgrade in the country’s sovereign rating, resulting in overall lower funding costs. The other side of the argument is that India is already better placed compared to several other emerging markets in the fiscal position.

Therefore, it won’t hurt if she decides to dole out half of this in the form of tax breaks or increase rural spending, which has visibly taken a backseat in recent years. In the interim budget, growth in rural and agri spending for FY25 was pegged at 8.7%, and the previous year, it was even less at 4.2%.

The problem is that when it comes to rural and agri spending, almost the entire amount goes into revenue expenditure, which is arguably unproductive. This government has refrained from stepping up rural spend for this reason.

Agriculture output was a tepid 1.4 percent in FY24, compared with 4.7 percent in the previous year. Private consumption was subdued at 4 percent, even as GDP galloped at 8.2 percent in FY24.

It’s important to recognize that one big reason the private sector is not investing as expected is the lack of confidence in growth, rather than the immediate need for additional capacities. Strong domestic private consumption growth is even more important, especially in an environment where we cannot take global growth and, therefore, exports for granted. While there is no question that the right way to do this is through job creation, which requires sustained investments, some relief measures may conflict with the overall growth objectives.

This is where the FM will perhaps do things a bit differently this time: the twist could be that she will choose to increase capex spending that will directly benefit the rural population.