The final 2024-25 budget is due to be presented later this month. Compared to the interim budget, the fiscal situation of the Government of India (GoI) appears to have improved marginally.
GoI’s gross tax revenue (GTR) growth for 2023-24 turned out to be 13.5% implying an annual buoyancy of 1.4. In contrast, the interim budget, according to the RE for 2023-24, had considered a growth of 12.5%. This higher growth will give an improved base magnitude for GoI’s GTR for projecting the tax revenues for 2024-25, which in turn will depend on the likely performance of macro parameters particularly the nominal GDP growth.
Growth and revenue prospects in 2024-25
According to the RBI, the real GDP growth for 2024-25 is estimated at 7.2%. To derive the nominal GDP growth, we need to formulate some idea about the implicit price deflator (IPD)-based inflation. This was unduly depressed at 1.3% in 2023-24 due to relatively low level of WPI inflation which was at (-)0.7%.
The IPD-based inflation is a weighted average of WPI and CPI inflation with the relative weight of the former being higher.
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Estimate for nominal GDP growth
The projection of WPI inflation for 2024-25 is close to 3% according to RBI’s Professional Forecasters Survey (June 2024). RBI’s own projection for CPI inflation for 2024-25 is 4.5%. Based on these numbers, our assessment for the IPD-based inflation in 2024-25 is at 3.6%. This, combined with a real GDP growth of 7.2% would provide a nominal GDP growth of about 11%.
And total revenue
Assuming at least a buoyancy of 1.1, we consider a GTR growth of 12.1% as feasible. If this is applied to the 2023-24 magnitude of GTR of Rs 34.65 lakh crore, we may get a GTR of Rs 38.84 lakh crore in 2024-25.
From this, we may deduct the state’s share in GoI’s GTR, leaving net tax revenue for the GoI of INR26.44 lakh crore. To this, we need to add non-tax revenues for assessing GoI’s revenue receipts. Luckily, non-tax revenues have also been rather buoyant due to RBI’s generous dividends. We estimate that with RBI’s declared dividend of Rs 2.11 lakh crore, GoI’s non-tax revenues in 2024-25 may be close to Rs 5.09 lakh crore. Thus, overall revenue receipts of Rs 31.53 lakh crore appears to be feasible in 2024-25. The key policy question is its allocation into capital and revenue expenditures.
Expenditure prospects
With some committed expenditures on the revenue account, the GoI may have to increase its allocation for revenue expenditures to accommodate a higher revenue expenditure growth. There is a likelihood of increased allocation for MGNREGA, food and fertilizer subsidies, and health expenditures. This would call for a higher revenue expenditure growth as compared to that in the interim budget which was only 4.6% estimated over Controller General Of Accounts (CGA) actuals for 2023-24.
Any pressure on increasing revenue expenditure growth would need to be balanced with adjustments in capital expenditure growth or moderation in fiscal deficit reduction target. Our assessment is that the GoI may not compromise on the announced fiscal deficit target which was 5.1% of GDP.
Assuming that this is retained, the augmented revenue receipts position would still permit an 8% growth in revenue expenditures amounting to an increase in the magnitude of revenue expenditures of a little less than Rs 3 lakh crore.
This arithmetic would still permit a capital expenditure growth of 19.2% which is essential for realizing a 7% plus real GDP growth for India given the continued global economic slowdown. As per the latest national income accounts, growth in private and government final consumption expenditures were rather low at 4% and 2.5% in 2023-24 respectively. These consumption expenditures need to be stimulated. While the increase in GoI’s revenue expenditures would play a positive role in this, the state governments will also have to stimulate consumption expenditures in the respective states.
Medium-term fiscal consolidation path
In the medium-term, GoI has to signal its commitment to reduce its fiscal deficit to GDP ratio to the FRBM norm of 3%. This may take three to four years from now. However, it will be useful for the 2024-25 budget to spell out the entire adjustment path, projecting forward, the level of debt to GDP ratio as fiscal deficit to GDP ratio progressively falls to 3%. At the same time, steps need to be taken to facilitate growth of private investment which would be helped by a reduction in the policy rate in the next few rounds of RBI’s monetary policy reviews.
The World Bank has projected a global growth in the range of 2.6% to 2.7% for the next three years. The final budget for 2024-25 provides a timely opportunity to the GoI to lay solid foundations for India’s medium-term growth in the range of 7% to 7.5%, well above the global growth average while signalling its commitment to reduce fiscal deficit and debt relative to GDP to FRBM consistent levels even as the world economy is challenged with low growth and unsustainable debt levels.
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