Union Budget 2024: Election results shouldn’t nudge NDA to stray from its fiscal goals

Budget 2024: How would you plan a fiscal roadmap on a pitch that has politically altered because of an unanticipated turn of events?

Governments, pretty much like households, need to prioritise spending. In any given year, the spending plans have a 12-month vista, which is what the union budgets seek to do. Budgets or spending plans, by definition, have to look ahead. The matter gets a little complicated when the year has to be broken down into two parts, not necessarily in equal halves, a situation that India goes through every five years during the Lok Sabha election years.

Twin Constraints Confronting FM Sitharaman 

In the current case, finance minister Nirmala Sitharaman faces a dense line of sight, confronting two broad sets of constraints not present during a non-election year.

One, she does not have the cushion of looking back at the last budget, which was “interim” in nature and had left many policy imperatives for the new government to take up.

Two, she will present the new government’s first full budget with an effective horizon of eight months (August-March), for the finance minister will rise again in the Lok Sabha in February 2025 to present a full year budget for 2025-26.

These two additional constraints, which are not present during a non-election year, limit the government’s fiscal headroom.

Fiscal Trajectory’s Influence On Growth 

How would you plan a fiscal roadmap on a pitch that has politically altered because of an unanticipated turn of events? Would you take risks and take the tempting bait to be populist at the cost of fiscal discipline? Or will you focus on playing the grafting game, conserve resources and opt for gradualism rather than a big-bang welfare handout approach? The final objective is to bolster the fisc— and that will give the economy canter onto a fast lane on a sustained basis in the coming years.

It is a complicated predicament, something similar to what Finance Minister Nirmala Sitharaman is likely facing ahead of the presentation of the Union 2024-25 in July.

In the Interim Budget, which she presented on February 1, 2024, the minister pledged to keep the fiscal deficit — a measure of how much a government borrows to meet its expenses—at 5.1 percent of GDP in 2024-25 from a revised 5.8 percent in 2023-24.

The government’s medium-term target of lowering the fiscal deficit to 4.5 per cent of GDP by 2025-26 required a 70 basis point (one basis point is one-hundredth of a percentage point) reduction in 2024-25.

The fiscal deficit target for 2024-25 has been set at 5.1 per cent of GDP, which is achievable given a nominal GDP growth rate of 10.5 per cent.

Revenue Led Fiscal Consolidation

To finance the fiscal deficit in 2024-25, the net market borrowings from dated securities are estimated at Rs 11.75 lakh crore, from a revised estimate of Rs 11.8 crore in 2023-24. The balance financing is expected to come from small savings and other sources. The gross market borrowings are estimated at Rs 14.13 lakh crore, from a revised estimate of Rs 15.43 lakh crore in 2023-24.

The finance minister has banked on better revenue mobilisation to keep the deficit under check. For 2024-25, The net tax receipts are estimated at Rs 26.01 lakh crore, up 11 per cent from the previous year’s revised estimates of Rs 23.2 lakh crore.

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After three years of strong rise, slower growth in government capital spending, from 33 percent in 2023-24 to 11 percent in 2024-25, has also offered more fiscal elbow room to the finance minister to contain the fiscal deficit within reasonable limits.

Fiscal Consolidation Is A Process

A key aspect would be to watch out whether the change in the political landscape prompts a course correction in the government’s fiscal philosophy with respect to welfare economics. In the interim budget, the finance minister was unambiguous that this government would shun the race of competitive populism through handouts, and instead lift people out of poverty through “empowerment”. “We believe in empowering the poor. The earlier approach of tackling poverty through entitlements had resulted in very modest outcomes”, she had said in her interim budget speech.

Fiscal puritanism would warrant that the election results do not force a change from this course and borrowing estimates aren’t revised to trigger a deviation from the glide path. Fiscal consolidation, after all, should always be seen as a process, not as an event linked to the electoral calendar.