CAN GOVT TARGET AGGRESSIVE SPENDING IN FULL BUDGET?

19 Jul 2024 , 03:40 PM

In whichever year the Lok Sabha elections are held, the Indian government must present two budgets. The first, an Interim Budget, is what is called a vote-on-account – a short-term approval from the Parliament to the government to spend. A full approval is given after the new government presents the full Union Budget after the results of the Lok Sabha elections are declared and the government is sworn in.

With the National Democratic Alliance government retaining its majority in the Lok Sabha in the 2024 elections, Finance Minister Nirmala Sitharaman will present the full budget sometime in July 2024. But the political, economic, and financial landscape of India has changed somewhat since the Interim Budget was presented on February 1, 2024.

The key numbers from the Interim Budget

The size of the Interim Budget for 2024-25 was Rs 47.66 lakh crore, 6.1 per cent higher than the revised estimates for 2023-24. With every budget requiring to be balanced, this means the central government’s revenue as well as expenditure were both Rs 47.66 lakh crore.

However, this is only after accounting for the government’s borrowings to meet its expenses, resulting in a fiscal deficit of Rs 16.85 lakh crore, or 5.1 per cent of GDP. This was down from the 5.9 per cent of GDP target set for 2023-24. Of course, the Interim Budget also announced a downward revision in the fiscal deficit for the last financial year to 5.8 per cent. Data released subsequently, on May 31, showed that the government over-achieved and the fiscal deficit was in fact reduced to 5.6 per cent of GDP in 2023-24.

Despite targeting an aggressive reduction in the fiscal deficit in 2024-25, the Indian government also focussed on capital expenditure to boost long-term economic growth. At Rs 11.1 lakh crore, the central government’s capital expenditure for 2024-25 was 16.9 per cent higher from the revised estimate for 2023-24.

What could change in the full Budget?

First things first: do the numbers change from the interim to full budget?

If one goes back to 2019-20, there were indeed some alterations to the key numbers after the National Democratic Alliance government retained majority in the Lok Sabha. For instance, total receipts and expenditure were 0.1 per cent higher in the final numbers, while capital expenditure was seen 0.7 per cent higher than in the Interim Budget.

These numbers are, of course, not significantly higher than what was estimated by the government before the elections; after all, when the size of the budget is Rs 28 lakh crore, what is an additional Rs 2,000 crore or so?

However, a similarly small increase was there in the fiscal deficit: from 3.3 per cent of GDP to 3.4 per cent. And unlike receipts and expenditure, a marginal increase in the fiscal deficit target can have consequences for the financial markets, especially the bond government. Why? Because a higher fiscal deficit means the government may end up borrowing more to finances its expenditure. And Higher government borrowing leaves that much less for the private sector.

As it turns out, while the fiscal deficit as a percentage of GDP was higher in the 2019-20 full Budget compared to the Interim Budget, in rupee terms, it was actually lower by a slight Rs 239 crore.

New economic order

The current situation, however, is different from 2019-20.

For one, the Indian economy is growing far more rapidly now. In the lead up to the 2019 elections, the Indian economy was slowing down, with GDP growth rate in 2018-19 declining to 6.5 per cent from 6.8 per cent and 8.3 per cent the previous two years. In fact, in 2019-20, growth fell even more sharply to just 3.9 per cent, although some of that can be attributed to the onset of the COVID pandemic in the final quarter of that financial year.

Now, growth is surprising continuously on the upside, with the government estimating that it rose to 8.2 per cent in 2023-24 from 7.0 per cent in 2022-23, although the Reserve Bank has forecast that it may fall to 7.2 per cent in 2024-25.

Will government change its Budget numbers?

Whether or not the government will change the key numbers in the full Budget is a matter of answering two questions: does it need to and can it do so?

According to political experts, the results of the 2024 Lok Sabha elections mean the Bharatiya Janata Party must rely more heavily on its allies for their support. Media reports say the Telugu Desam Party and Janata Dal United want their states Andhra Pradesh and Bihar to get ’Special Category Status’, which ensures more money from the central government to fund certain schemes. According such a tag will cost the Indian government more.

Interestingly, the government can actually afford to spend more this year. In May 2024, the Reserve Bank of India transferred a record Rs 2.11 lakh crore to the Indian government as dividend for 2023-24. Just how large is this number? It is more than double the budgeted figure of Rs 1.02 lakh crore as dividend from the central bank as well as state-owned banks. This gives the government more than Rs 1 lakh crore of spending room it had not anticipated.

Crucially, the government can show in the full Budget that it can afford to spend more without compromising on the fiscal deficit target of 5.1 per cent of GDP. This is important not just for the bond market but also to keep global ratings agencies happy, with S&P Global Ratings raising the outlook on India to positive from stable on May 29, just days before the election results were declared. And improving the government’s finances are key to getting an upgrade, with India’s rating pegged at the lowest investment-grade level by S&P, Moody’s Ratings, and Fitch Ratings.

FAQs

1. What is an Interim Budget?
   An Interim Budget, also known as a vote-on-account, is a short-term approval from Parliament that allows the government to spend until the full Union Budget is presented and approved after the Lok Sabha elections.
2. Why does the government present two budgets in an election year?
   In an election year, the government presents an Interim Budget before the elections for immediate spending approval and a full Budget after the elections to reflect the new government’s priorities and plans.
3. What was the size of the Interim Budget for 2024-25?
   The Interim Budget for 2024-25 was Rs 47.66 lakh crore, which was 6.1% higher than the revised estimates for 2023-24.
4. How does the fiscal deficit impact the economy?
   A higher fiscal deficit indicates more government borrowing, which can reduce the funds available for the private sector and affect financial markets, especially the bond market.
5. How does the government plan to boost economic growth in 2024-25?
   The government is focusing on increasing capital expenditure, which was set at Rs 11.1 lakh crore for 2024-25, a 16.9% increase from the previous year, to boost long-term economic growth.
6. Can the full Budget numbers differ from the Interim Budget?
   Yes, there can be alterations to the key numbers in the full Budget compared to the Interim Budget, although they are usually minor.
7. Why might the government spend more in the full Budget?
   The government might spend more due to increased demands from coalition partners for special category status for certain states and the unexpected high dividend of Rs 2.11 lakh crore from the Reserve Bank of India.
8. How does the government balance spending with the fiscal deficit target?
   The government can afford to increase spending due to the higher-than-expected dividend from the RBI without compromising the fiscal deficit target of 5.1% of GDP.
9. Why is the fiscal deficit target important?
   Maintaining the fiscal deficit target is crucial for keeping global ratings agencies satisfied and maintaining India’s investment-grade credit rating.