Before parsing the Union Budget for the next fiscal, here’s an important fact. Since high committed expenditures (read, salaries and pensions, interest payments, and subsidies) hog a major share of the government’s total tax revenue, at over 90 percent, there is little wiggle room for discretionary spending – or what’s left for high-quality spending on physical and social infrastructure. The pandemic had necessitated fiscal flexibility to keep the economy afloat, even if it raised internal debt.
This budget has chosen to revert to fiscal rectitude. It has budgeted a fiscal deficit of 5.9 percent of GDP for fiscal 2024 (vs on-target 6.4 percent in fiscal 2023 in the revised estimates), aiming to retrace the earlier envisaged glide path to 4.5 percent of GDP by fiscal 2026.
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In a climate of slowing growth and myriad other global challenges, what this budget does is focus resolutely on lifting the capex cycle and greening it. There is a near consensus that India’s gross domestic product (GDP) growth will slow in the coming fiscal, both in real and nominal terms. CRISIL expects it to grow 6 percent in real and 10.5 percent in nominal terms in fiscal 2024, down from 7 percent and 15.4 percent, respectively, this fiscal. This is inevitable for three reasons. One, the inclement external environment, with an impending recession in advanced countries, will hit India’s exports and trade-linked sectors. Two, the monetary tightening by the Reserve Bank of India (RBI), through a cumulative policy rate hike of 225 basis points so far this fiscal, will have a lagged impact on growth next fiscal. Three, elevated geopolitical tensions will keep crude and commodity prices volatile, and possibly high.
Growth Estimates
So, the budget assumption of nominal GDP growth of 10.5 percent in fiscal 2024 is realistic and, accordingly, its estimate of tax revenue is achievable. Gross tax revenue is projected to grow at the same rate as nominal GDP, yielding a tax buoyancy of 1 percent, which is roughly the same as the pre-COVID decadal average. Given the limited upside from taxes in the near term, the budget continues to depend on incremental support from divestment and asset monetisation to mobilise resources for investment, though the target for these is set at a modest Rs 51,000 crore.
Within these constraints, the government has managed to maintain focus on its leitmotif of capital expenditure (capex). But, here too, a lot will depend on states: they account for two-thirds of total public capex. CRISIL’s analysis shows states tend to back-load their capex in a given year and have made disparate progress this fiscal. We may also end up seeing them spend differently next fiscal as many go to polls this calendar year, followed by a crucial general election in the next.
The Centre’s capex, of which infrastructure spending is a big part, is now supported much more through direct budget allocations and less through the public sector’s internal and extra-budgetary resources (IEBR); the latter not reflecting in fiscal deficit numbers.
Capex Plans
The budget plans a 27.7 percent increase in total capex in fiscal 2024, taking its ratio to GDP up by 90 basis points to 6.2 percent. The focus remains on sectors providing crucial infrastructure such as roads, railways, oil and gas and power and renewable energy.
To create space for capital spending, the subsidy bill is lowered by Rs 1.6 lakh crore to Rs 4 lakh crore in fiscal 2024. If global crude and commodity prices remain softer, in line with slowing world demand, this might indeed bear out. But in the current geopolitical setting, upside risks remain high. A stronger-than-expected rebound in China’s demand, after the reversal of its zero-COVID policy, can also create an upside to commodity prices.
The direct tax changes are aimed at incentivising the transition towards an exemption-less system (new tax regime) while giving relief to the taxpayers by adjusting the tax slabs and exemption limit. The tax tweaks will trim the government’s tax revenue by almost Rs 37,000 crore and this can be seen as a benefit to taxpayers that they can spend or save. The benefit will largely flow to taxpayers in the Rs 5-9.5 lakh category.
The focus now shifts to the execution of the wide-ranging pronouncements.
Dharmakirti Joshi is Chief Economist, CRISIL. Views are personal and do not represent the stand of this publication.
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