Budget 2024: Centre’s fiscal policy likely to stay on the beaten track

What could continuity imply when it comes to fiscal management?

The key question about the budget that everyone seems to be fretting over:  given the election results, whether the new government will continue with its fiscal strategy of the past decade or will the compulsions of coalition politics force it to make compromises. There are some clues. The allocation of ministers and ministries in the new cabinet seem to indicate two things. The BJP is clearly asserting its rights as the dominant coalition partner and signalling continuity of its policy stance of the past ten years.

What has been the fiscal strategy of the past 10 years of BJP rule? What could continuity imply when it comes to fiscal management? Firstly, BJP rule has seen an unwavering focus on fiscal consolidation to rein in public debt. Fiscal compression remains essential as central government public debt at 57 percent of GDP remains (going by interim budget estimates) above the pre-pandemic five-year average of 51 percent of GDP.

The second element has been a decision to improve the “quality” of spending to spur growth by prioritizing capital over revenue expenditure. Income multipliers for capital expenditure are known to be much stronger than revenue expenditures. While revenue expenditure was over 7 times that of capital expenditure in the 2011-2015 period, it dipped to around 4 in 2023-24. Interestingly, even during the COVID period when reckless fiscal transfers (revenue expenditures) became the norm in many economies, the government stuck to this “quality” discipline. It did use fiscal transfers but complemented them deftly by using food-stocks and targeted lending backed by guarantees.

The third element of the fiscal strategy, that perhaps does not get the attention it deserves, is targeted spending on welfare schemes and social infrastructure. The government’s big ticket infrastructure successes, particularly its aggressive highway programme, are often highlighted in the media and policy forums. However, the fact is that major milestones on the more micro infrastructure projects have also been crossed. Take SAUBHAGYA, the universal electrification scheme where 100 percent of the target has been met. Almost 80 percent of the ambitious drinking water access programme has also been completed and the shortfall is concentrated in a just a couple of states. The governments’ focus on digitalization has helped -- sealing leakages in subsidy and welfare payments. It is likely that the July budget will continue this three-pronged strategy.

Fiscal Policy in Budget 2024: What’s in Store

A new government’s first budget typically provides the medium-to-long-term roadmap for policy. Of the many demands on the exchequer, a couple of areas need focused attention. Job creation remains a challenge and the response, at least, partially would be to pivot further towards large-scale labour- intensive manufacturing. This requires a healthy, skilled workforce for generations to come. India’s problem is that while there are pockets of high skill workers, average labour productivity is low. Thus, higher spending on health and education are imperative along with skilling.

In the last budget, health and education expenditure as a percentage of GDP was 0.3 and 0.4 percent respectively. These need to increase to at least 1 and 2 percent respectively over the next couple of years

Secondly, while headline agriculture growth over the past decade has been impressive at around 4 percent, small and marginal farmers have their fair share of woes. This was exacerbated by COVID. The frequency of extreme weather events on the back of climate change have brought on a new set of challenges. They need support on multiple fronts – better marketing facilities, access to farm equipment and hand holding in switching to more remunerative crops. The budget needs to draw a blue-print for an overhaul of the farm sector.

Can these be accommodated while consolidating the public debt without raising taxes significantly? For 2024-25, the hefty dividend of Rs 2.11 trillion from the RBI, far more than what was budgeted creates considerable additional fiscal space. For the longer term however, raising the tax to GDP ratio and aggressive asset sales are imperative to keep the strategy in place.