Interim Budget seeks to decouple budget-making from long-term policy goals

Finance MInister Nirmala Sitharaman presented the 2024 interim Budget today

On December 7, Finance Minister Nirmala Sitharaman sought to temper down expectations about the Interim Budget, which she said will be“nothing spectacular”. She broadly stuck to that line on February 1. That said, Sitharaman’s interim budget for 2024-25 stood out for two distinct characteristics.

For one, it sought to strike a distinction on accounting and policy making. Annual budgets, by definition, need to be just that: a plan on how to spend and how to earn. This includes borrowing too. Governments, like households, cannot finance all their expenses from current earnings. For instance, a family mostly buys a house on a loan. It is an asset that is funded over the medium term and has inter-generational needs. Similarly, for the government too. A good marker of prudent public finance management is to gauge how much borrowed money is being spent on financing asset creation, such as roads and ports, which will not only serve generations of people, but also unleash strong economic multipliers.

To this effect, Sitharaman’s interim budget for 2024-25 stood out for its unwavering focus on capital expenditure. She has pencilled in a total government capital expenditure spend of Rs 11.1 lakh crore in 2024-25, up 11.1 percent in 2023-24. During the year, the government's fiscal deficit has been projected to fall to 5.1 percent of GDP, from 5.8 percent in 2023-24, demonstrating the government’s intent to walk the talk on fiscal discipline, withstanding ostensible pressures to present a populist budget in an election year.

The interim budget’s fiscal math makes it clear that capital expenditure or asset creation is where the emphasis will be sharply focussed on. The net market borrowings for 2024-25 is projected at Rs 11 lakh crore, which is about the levels of what the government intends to spend on infrastructure asset creation as mirrored in the capital expenditure plans.

Whether pre-election populist promises yield votes and swing poll results need deeper research and data. It is nobody’s case that in a 1.4 billion-strong nation, in which nearly one in every three live below the poverty line, one needs an effective and efficient method through which privileged tax payers can support the poor.

But, this should not come at the cost of unending borrowing to fulfil poll promises about freebies that are not carefully fiscally weighed. It may be good electorally, but is certainly not good public finance management, which is something the finance minister seems to have been guided by.

Offering freebies through non-merit subsidies carries the worrying risk of making the voting process a transactional activity in a different hue. It is characteristic of a promissory note that is not always founded on sound economic principles. The focus should rather be on empowering voters through health, education, and infrastructure.

The other stand out characteristic of the interim budget, is more nuanced. It signals a distinctive departure to decouple policymaking from the annual budget accounting exercise. The goals for 2047 are a case in point. These define the long-term macroeconomic and socio-economic goals within a broad matrix that the country should seek to accomplish.

Policymaking is the art of the possible. Seeking to look 25 years ahead is similar to putting the accent on long-term milestones. It also enables us to break down the long-term goals into smaller milestones that can be achieved every five to 10 years. Short-termism in policymaking can often obfuscate the vision. Budget making should seek to take an annual account of longer-term ambitions, and not be dictated primarily by annual or electoral calendars. To that extent, Sitharaman’s interim budget marks a definitive change in attitude.