Interim Budget of FY 2024-25: Financially Prudent, Poll Ready sans Fireworks

 

Finance Minister, Nirmala Sitharaman, presented a surprisingly austere, fiscally prudent, political budget, a vote on account, before the impending general Elections. The less than 1 hour speech, was bereft of big bang announcements, unlike the last interim budget of FY 2019-20, presented by Piyush Goyal, that had the PM Kisan Scheme of Rs 6000 each, benefitting around 12 Crore Indian Farmers & a Tax rebate of Rs 12,500 for the salaried class, earning under Rs 5 lakhs, helping them become “tax Free”. Write off of pending taxes up to Rs 25000, per head, for cases between 1962-2010 & Rs 10,000 for the period 2011-14 was announced, through its impact on polls is difficult to predict; it will help clean the Income Tax books though.

Some announcements for the segments identified by the PM under the Acronym GYAN (Garib, Yuva, Annadata, Nari) - as the focus of this government, as a counter to the caste census demanded by the opposition – was expected but the FM merely reiterated the existing schemes, without adding any new pronouncements.  

It was a “political budget” that promised a White Paper on the mismanagement of the economy prior to 2014, & listed the achievements of the BJP, over the last decade. Expect the white paper to be weaponized during the elections.

A financially prudent budget it definitely was. The Revised Estimate (RE) for the Fiscal Deficit for FY 24 was lower at 5.8% Vs the Budget Estimate (BE) of 5.9% & pegged at a still lower 5.1% for FY 25, in line with achieving the glide path of 4.5% by FY 26 – a prudent macroeconomic strategy against the backdrop of a volatile global environment. The drop in Gross Borrowings, therefore, to 14.1 Lakh crore & Net to 11.75 Lakh crore, to “crowd-in” Private investment, was rewarded by the bond Market, with yields dropping by 10 basis points, akin to a Rate cut & Banks gaining, expecting a Marked to Market (MTM) Treasury gains.  A sovereign ratings upside is not expected, though, as the govt. believes that the International Rating agencies continue to remain biased.

The Govt. may still surprise with off budget announcements:

·         The free food grain scheme for the 80 cr. Garib populace has been extended, for another 5 years, pre-budget - to aid the marginalized suffering from a K shaped recovery.

 ·       In Sept 2023, the Women's Reservation Bill, granting 33% reservation for Nari (Women), in Lok Sabha & State Legislatures was passed by Parliament.

·         Expectation of an inflation adjusted upside announcement for the Annadata (Farmers) from Rs 6000 to Rs 8000 was belied though.

An increase in the capex budget, to a perceived auspicious number of 11.11 lakh cr. (3.4% of GDP), is however welcome ­ - as public expenditures multiples are large - as is the Tax to GDP ratio rise to 18%.  A 1 lakh cr. scheme for rooftop solar, for 1 crore households, to enjoy 300 units of free power per month & sell the excess, thereafter, to the grid, & earn a potential Rs 15000 per annum, which the Secretary TV Somanathan, claimed has a potential to create 1 crore installation & maintenance jobs in principle sounds good in the absence of details, as do the Long-term interest free loans with a corpus of 1 Lakh cr. for funding R&D Budgets. Interest free long term capex loans to states of 1.3 Lakh crores – - an extension of an existing scheme - is, however, welcome, as is the extension of certain sunset clauses. The preferential 15% Manufacturing tax rate, ending on Mar 31^st2024 & has, rightly, not been extended, as corporates too cannot seek unending timelines.

The Numbers

 Takeaways:

·         Nominal GDP Growth from 273 Lakh Crores in FY 23 to 297 Lakh crores in FY 24 - a growth of  8.8% & real GDP growth of 7.3% projected - indicates presence of a low inflation deflator. A higher inflation deflator would reduce Real GDP & challenge the "Fastest Growing Large Economy" tag. Tax Revenue grew by 10.7% (1.22 Multiple of Nominal GDP Growth of 8.8%) 

·        A Nominal Growth of 10.5% from 297 lakh crores in FY 24 to 328 Lakh cr. in FY 25 & Tax Revenue growth at 12% - a multiple of 1.15 projected, close to the 1.22 multiple of the previous year - a rational no. against the backdrop of a likely drop in Excise Revenues. In May 2022, Excise Duties on Petrol & Diesel were reduced by Rs 8 & Rs 6 per liter respectively & a further drop as a poll sop, masquerading as an attempt to tame inflation, is not unlikely.  

·         Capital Expenditure as a % of the Budget goes up from 17.6% in FY 23 to 23.6% (Rs 11.11 Lakh Crore) in FY 25 which is welcome.

·         Effective Capital Expenditure has increased to around 31% in FY 25 - about Rs 15 Lakh Crore (11.11 + 3.85 Lakh cr. as Grant in aid for creation of capital). Add the likely 3.5 - 4 lakh crore PSU capital expenditure loads up to an impressive figure of around 18.5 Lakh cr. which is impressive.  

·         Primary Deficit which used to near zero, pre-Pandemic, has moved into positive territory which needs to be addressed.  This could also be since off-balance items have been included in the budget since, leading to more transparency though.

The Concerns

·         India spends 25% of its total Budget of 47.65 Lakh Crores on Interest payments, 16% on Security - 13% on Defense & 3% on Home Ministry - & 2.4% of communications, which are central subjects. While One Rank One Pension (OROP) increased the Defense Pension outgo, the Agni Path scheme, launched in 2022, is an attempt to rationalize the pension payout & lower the median age of the armed forces. Reduction in Central debt, as a % of GDP, & hence interest outgo should be the prime aim of the government, going forward.

·   About 2% of the Budget goes towards civil pensions & 8% towards subsidy. The New Pension Scheme NPS 2004 was an attempt at reducing civil pensions apart coupled with the steady decrease in central government & PSU employment since 1996.

·      With around 31% of Budget as Effective Capital Expenditure & with 53% across the aforementioned items, leaves only around 16% for all other Ministries, nullifying the oft repeated argument that the size of Govt. is large.  In fact, India needs greater state capacity even as we refrain from creating white elephants.  The example set by Government of Singapore is a good template to follow.

Furthermore:

 ·         In a volatile Northern & Western border scenario & with China’s India encirclement encompassing Maldives too, the dip in the Defense Expenditure is inexplicable.

·         While weeding out bogus beneficiaries to rationalize subsidy is always welcome, the steep drop in nos. for 2 consecutive years, is troubling, as rural distress is palpable with the ill effects of El Nino & the increase in the no. of people dependent in Farming increasing from 20 cr. in 2019 to 24 cr. in 2021 due to the pandemic, impacting incomes.

Conclusion:

Nirmala Sitharaman, equaled Morarji Desai’s record of presenting 6 consecutive budgets & shall be remembered for launching the 15% preferential Tax on Manufacturing & reducing corporate taxes to a competitive 22%, in 2019. Both were off Budget announcements & those who aver that her interim budget lacks “fireworks” should not be surprised if the aforementioned trend continues.

Launch of the Production Linked Incentive (PLI) Scheme in 2020 & bringing in off budget items into the General Budget, during the Pandemic Times, when Fiscal Deficits of all countries worldwide were rising - and Rating Agencies were looking away - timed in greater transparency. Her latest Interim Budget sans fireworks is definitely “financially prudent” as a “Vote on Account” ought to be.