In the upcoming Union budget, the Centre will make prudent promises as always about keeping its finances in check. But this time, striking the right balance won’t be easy. For one, the 2024 Lok Sabha elections are looming, and the political temptation to spend will be unmissable. A likely slower economic growth next year won’t help either, and high tax revenues can’t be taken for granted. All this makes Budget-framing a challenging exercise.
In the upcoming Union budget, the Centre will make prudent promises as always about keeping its finances in check. But this time, striking the right balance won't be easy. For one, the 2024 Lok Sabha elections are looming, and the political temptation to spend will be unmissable. A likely slower economic growth next year won't help either, and high tax revenues can't be taken for granted. All this makes Budget-framing a challenging exercise.
In 2022-23, finances have been well on track, with little dent from fuel duty cuts and higher subsidy expenses. In fact the Centre's bill on major subsidies had already reached 95% of the full-year budget by November, and analysts see it overshooting the aim by as much as ₹2.5 trillion by the time the year ends. But revenue has kept pace. That, too, could top the estimate by about ₹1.8 trillion.
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Additional leeway is seen from healthy growth. The last budget pegged the fiscal deficit—the extent by which spending exceeds revenue—for 2022-23 at ₹16.6 trillion, or 6.4% of GDP. But that was when the Centre believed nominal GDP would rise 11.1%. That's changed: a fresh estimate released on Friday predicts growth at 15.4%, which means the Centre can keep its 6.4% promise even if fiscal deficit overshoots the target by about ₹0.9 trillion.
For this year at least, this spells a clear ability to spend within the means, even while going ahead with the ₹7.5-trillion capital expenditure target. But the story will change in 2023-24.
Fiscal Hole
In its budget on 1 February, the Centre could set its fiscal deficit target for 2023-24 at 6% of GDP, but it could be difficult to achieve due to the fiscal pressures likely to arise ahead of the 2024 national elections, said analysts at Fitch Ratings last month. Take, for example, the Pradhan Mantri Garib Kalyan Anna Yojana, under which beneficiaries of the public distribution system saw their subsidized foodgrain entitlement being topped up. With the pandemic in check, the Centre was expected to end the scheme soon. And so it did, last month—but alongside it converted the existing subsidized food scheme into a free-of-cost one for a year. Commentators say it would yield an electoral dividend. The reorientation will even save the government money worth 0.6-0.7% of GDP, but it also stands to lose revenues that it could have made from the subsidized food sales, Nomura said in a recent note.
Meanwhile, the government may also have to continue robust capital expenditure to support slowing growth, which will bring challenges of its own. With analysts forecasting a nominal GDP growth of about 11% in 2023-24, the fiscal deficit may have to be contained at ₹18.8 trillion for it to be 6.2% of GDP, and ₹18.2 trillion for it to come down to 6%, Mint calculations show. The Centre aims to bring the fiscal deficit down to 4.5% by 2025-26.
The Budget itself is not likely to announce a sharp rise in revenue expenditure, according to economists. But an expected growth moderation, rural distress and external uncertainties could mean that by this time next year, the Centre may be forced to spend more than it will budget. (This year, too, apart from additional grants on food and fertilizer subsidies, the government has sought the Parliament's nod for higher spending for rural areas.)
Tax Trends
This year robust tax collections have helped offset some of the unforeseen spending, which came in the form of excise duty cuts on fuel and higher subsidy bills following the sharp rise in prices as a result of the Russia-Ukraine war. However, a closer look at the numbers shows the government may have underestimated its gross tax collections in the first place. The Budget projected ₹27.6 trillion in gross tax collections, but had already earned 65% of it by November, the latest month with available data.
In 2021-22 as well, the actual tax collections have overshot even the revised estimate by nearly ₹2 trillion. This is a reversal in the earlier trend, when the government used to overestimate tax mop-ups (and underachieve) between 2018-19 and 2020-21. This used to put fiscal strain by the end of the year. With growth set to slow down in 2023-24, the rapid growth in tax collections so far could also weaken, and if the government chooses to continue with conservative tax targets, it may limit the scope for more announcements in the Budget itself, which will be closely watched for election sops, economists said.
Goods and services tax (GST) collections have been the biggest contributor to gross tax revenue for the past three years (2.9% of GDP in 2021-22), having surpassed corporate tax collections in 2019-20, when corporate tax cuts were announced. Robust GST collections this year have also been a major boost for the government's coffers. However, higher revenue through indirect tax collections has been criticized by many policymakers and economists as it puts undue burden on poor Indians who are already reeling under higher inflation and could prove detrimental to a revival in consumption.
The government faces an unenviable fiscal tightrope again.
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