Budget 2024: Demand revival measures face fiscal deficit constraints    

A reduction in taxes and combating inflation through supply side and fiscal measures are the order of the day.

A 7.3 percent projected GDP growth for the current year, a declining current account deficit and fiscal deficit on target, all provide a propitious backdrop to the Interim Budget on February 1. For sure, no path breaking measures can be expected, being a vote on account, but nevertheless it could still spell out the growth path for the future.

The growth agenda flows from the recent GDP numbers. The 7.3 percent GDP growth in 2023-24 was mostly from increased capital formation, not personal consumption – the traditional driver. This is a cause for worry especially since rural demand seems to have been impacted by inflation or reduced incomes or both.

For demand revival, a reduction in taxes and combating inflation through supply side and fiscal measures will be in order, but whether there will be enough fiscal space is the question. The extension of the free food programme for five more years is expected to cause a major pinch and the budget estimate for food subsidy at Rs 1.97 lakh crore is likely to go up.

On the monetary side, the 250 bp policy hike by the RBI helped cool down inflationary expectations while also helping banks shore up their profits. This enabled the PSU banks to pay out larger dividends, which along with the RBI dividends, came handy in plugging the shortfall in disinvestment receipts. With interest rates unlikely to come down soon, the banking sector could see continued profitability which will be good news.

Managing Domestic Inflation

International oil prices will continue to be the key for managing current account and domestic inflation. But it is unlikely that the longstanding demand for the inclusion of petroleum products under the Goods and Services Tax (GST) will be met. Hopefully there will not be a cutback on funding energy transition and net zero-emission capital investments of state state-owned oil marketing companies (provision of Rs 30,000 crore) which many seem to expect.

Government capex expenditure will likely get increased allocation, given that it lifted growth during 2023-24. But that has mainly been in two sectors viz. highways and roads and Railways. Although it resulted in increased construction activity and production of steel and cement, the real second order effects viz. increased private investment, high quality jobs and output, will take time.

With the massive cost and time overruns in the BharatMala project (BMP), allocation to NHAI will perhaps go up (Rs 1.6 lakh crore provided for 2023-24). The Government needs to look beyond roads to other infra sectors such as power, telecom and transport as these can not only create more high quality jobs than construction but can also attract greater private participation which will relieve the pressure on the Budget.

Road projects such as the BMP continue to be implemented under EPC and Hybrid Annuity methods which require large budgetary support.  But the PPP mode also entails greater financing availability. With banks having neither the bandwidth (asset liability mismatches, legacy NPAs) nor the capabilities, deep bond markets are the only way to go, but this has unfortunately remained a clichéd exhortation.

The newly created institutions like NABFID are still in their infancy with a loan portfolio of only around Rs 16,000 crore as on September 2023. The primary stumbling block to a deep and vibrant debt market is the large fiscal deficit itself, which preempts a massive portion of long term funds in the system today (bank deposits, insurance and pension funds).

Banks Struggle With NPA 

For banks, a long term solution still evades the NPA problem, though the absolute levels have come under control. The measures announced in the 2021 Budget such as the creation of NARCL and IDRCL (better known as the Bad Bank) have not played out as expected. There had also been talks of divestment of stake in two public sector banks but it is unlikely that this will happen in an election year.

NBFCs and fintech lenders were also in the news on account of the pressure on funding resources as also their unsecured lending. With RBI nudging NBFCs to reduce dependency on banks, they will look for alternate lines of liquidity support. Fintech lenders have long been hoping for a GST subsidy for startups working towards financial inclusion through digital services as also government benefits.

For crypto players, reducing taxes (from 30 percent with 1 percent TDS) and treating gains from Virtual Digital assets on par with other capital assets will top their wish list. With the Central Bank Digital Currency (CBDC) announced in 2022 achieving a milestone with digital rupee transactions surpassing one million daily transactions in December 2023, perhaps we can also look for digital initiatives particularly on supporting infrastructure to further its financial inclusion capabilities.

SA Raghu is a columnist who writes on economics, banking and finance. Views are personal and do not represent the stand of this publication.