Now that Nirmala Sitharaman has returned to the ministerial portfolio she held for the last five years, the Union finance ministry has got down to its most important task — preparing the Budget for 2024-25. An Interim Budget was presented by her on February 1 earlier this year, but that was only a vote-on-account, seeking Parliament’s approval for incurring a specified amount of expenditure till such time as the full year’s Budget is presented by a new government and approved by Parliament. Unlike a few of the previous Interim Budgets, Ms Sitharaman refrained from making any policy announcement or taxation changes, honouring convention and staying on the path of correctness. Now, as she gets ready to prepare the full Budget for the current year, what should be her key concerns?
Undoubtedly, the macroeconomic circumstances under which the forthcoming Budget will be prepared are looking healthier than what prevailed when the Interim Budget was presented. Retail inflation is under control, even though it is still above the government-mandated target of 4 per cent. Gross domestic product or GDP grew by 8.2 per cent in 2023-24 and is expected to grow by 7.2 per cent in the current year. Foreign exchange reserves are comfortable at over $640 billion. The current account deficit was well under control at 1.2 per cent of GDP in the first three quarters of 2023-24 and may even be lower than 1 per cent for the full year, according to some estimates. There are, however, worries on the exports front, with merchandise goods exports falling marginally last year and service exports losing their earlier momentum. With geopolitical tensions showing no signs of subsiding, international commodity prices, particularly those of crude oil, could be another cause for concern. But, overall, the Budget for 2024-25 can benefit from reasonably sound fundamentals of the Indian economy.
There is yet another positive boost for the 2024-25 Budget that comes from recent developments. The Reserve Bank of India’s (RBI’s) surplus transfer this year would be 133 per cent more than what was originally expected. The total transfer estimated at ~2.1 trillion will create an additional fiscal headroom of almost 0.37 per cent of GDP. Should the government use the extra receipt to reduce its fiscal deficit, or increase investment to add to the country’s infrastructure capacity, or provide tax incentives to revive consumption demand, or take steps to create more jobs at the lower end of the employment market?
The efficient husbanding of resources by the government last year has meant that the fiscal deficit for 2023-24 has been brought down to 5.6 per cent of GDP, against the Budget estimate of 5.9 per cent. This should make the task of reducing the deficit to 5.1 per cent, as projected in the Interim Budget, relatively easy. Indeed, the finance ministry can aim at a sharper reduction to achieve the 4.5 per cent target earlier than 2025-26 and outline a new glide path for meeting the optimum target of 3 per cent over the next few years. The big policy options that need to be exercised by the next Budget is whether it should focus only on reducing the deficit this year or use the available resources to address other pressing needs of the economy, such as investments, employment creation and boosting consumption demand. A mixed approach would be ideal.
The second upside for this year’s Budget may come from unexpected quarters. From July 2022 to June 2024, the government’s goods and services tax (GST) compensation cess revenue is likely to be around ~2.7 trillion, which is the amount the Centre had borrowed from the RBI on behalf of the states to meet their revenue losses during the Covid months. While the states ceased to get any compensation cess benefits from July 2022, the Centre has been collecting that amount to help it repay the loans.
Details of the actual repayment liability on this account are not available, but it is likely that the full repayment will be completed before the end of March 2025. This will offer an opportunity for the government in two ways. The finance ministry could remove the GST compensation cess (at present the cess is applied to non-merit goods like tobacco products, aerated water and motor vehicles at different rates) or subsume a part of it in the revised rates for such products. Ideally, the cess should be removed, and this exercise should be aligned with the overall long-pending GST rate rationalisation to reduce the multiplicity of rates and increase the revenue neutral rate for the GST regime. The second benefit could be to use the removal of the compensation cess for reducing the overall GST incidence on products and services and boost demand.
Going beyond the Budget options, there is a major reform that the finance ministry could undertake by introducing greater transparency in Budget presentation. All budgets presented after general elections have relied on the revised estimates of the preceding year, which were presented in the interim Budget. However, by the time the full budgets are presented, the finance ministry has access to the provisional numbers for the previous year, even though they are unaudited. Notably, in a few of the budgets for pre-election years, the differences between the numbers given in the revised estimates and the provisional estimates have been quite significant.
For instance, in 2008-09, the provisional estimate for total revenue receipt was 3 per cent lower than what was given out in the revised estimate. And the government’s capital expenditure in the provisional estimate was 8 per cent lower than the corresponding number in the revised estimate. In 2013-14, the government’s net tax revenue in the provisional estimate was 2.4 per cent less than it was in the revised estimate. The variations reached excessively high levels in 2018-19, when the provisional estimate was 9.6 per cent lower than the revised estimate for total revenue receipt, 11 per cent lower for net tax revenue and 6 per cent lower for total expenditure. In most of these cases, these differences did not make a major impact on the final fiscal and revenue deficit numbers. But the variations in revenue and expenditure figures meant that any reading of the economy based on those numbers would have been misleading.
More importantly, the full Budget estimates presented for the election year made comparisons that were patently inaccurate. The Budget documents would provide numbers on revenue and expenditure only under the heads of Budget estimate and revised estimate, even though sharply divergent figures based on the provisional unaudited estimate would be available with the government.
The differences between the provisional figures and the revised estimates for 2023-24 have not been sharp (the former numbers have been 1 per cent more than the revised estimate), but the finance minister could be more transparent if the Budget provides the provisional numbers as well, along with the revised estimates, so that a more accurate reading of the government’s revenue collections and expenditure pattern could be possible. That decision would be another step towards imparting greater transparency to budget-making.
AK Bhattacharya @AshokAkaybee is the Editorial Director, Business Standard. Views are personal.
Free-market economy, ending socialism will create employment and reduce fiscal deficit in accordance with principles of economics. According to politicians of all hues—freebies, subsidies, reservation, and loan waivers will generate votes; the resulting fiscal deficit and unemployment are to be ignored as flatus.