Will interim Budget further boost welfare expenditure?

As the government prepares to present the interim Budget on February 1, several reports have emerged indicating that welfare expenditure could see an increase. While Finance Minister Nirmala Sitharaman in December ruled out any "spectacular announcements" in the interim Budget before the Lok Sabha elections, foreign brokerage Jefferies has said the government will boost welfare spending on February 1. These developments raise three crucial questions. First, will welfarism indeed get a further boost in the interim Budget? Second, through which schemes or measures would this be achieved? And last but not least, will fiscal discipline take a hit due to populist spending? To find out the answers, read the transcript of the Business Standard Morning Show's third interim Budget special.         

The announcement of interim Budget 2024-25 on February 1 will likely see the central government give another boost to welfare expenditure, while still sticking to the fiscal consolidation path.    

 

On the topic, Business Standard's A K Bhattacharya had this to say:

• Interim Budget will focus on enhancing outlay for existing welfarist schemes
• It is unlikely to introduce any new scheme for the poor and the underprivileged
• Govt will be focused on welfare in the interim Budget  

 

Business Standard’s Indivjal Dhasmana agreed that with elections approaching, the government would focus on welfarism in the upcoming interim Budget. He also pointed out the fiscal consolidation challenge this would pose for the government.  

Dhasmana explained:

• Govt will weigh economic costs of welfare schemes against political benefits
• PM-KISAN, unorganised sector pensions, and women-centric schemes may get more funds
• Free food grain scheme has already been extended
• But, govt will have to keep fiscal math in mind
• Fiscal deficit likely to be pegged at 5.2 per cent of GDP for FY25
• Fiscal deficit in absolute terms may be less in FY25 than in FY24
• Govt may have to curtail capital expenditure growth
• Capital expenditure growth may be around 6 per cent in interim Budget

The Centre’s post-Covid-19 fiscal consolidation plan calls for reducing the fiscal deficit to 4.5 per cent of GDP by FY26.

News reports have already emerged about the schemes that Dhasmana believes could see increased allocations. According to reports, the government could increase the allocation under the Pradhan Mantri Kisan Samman Nidhi Yojana, or PM-KISAN scheme. The allocation per farmer could increase from Rs 6,000 annually to Rs 8,000. The government could also increase provisions under the PM Garib Kalyan Anna Yojana and is considering raising the minimum pension amount under the Atal Pension Yojana, its flagship scheme for unorganised sector workers. One government official told Business Standard that a decision was likely either in the interim Budget or outside of it. Also, the government is reportedly working on doubling the insurance cover under its flagship Ayushman Bharat health scheme to Rs 10 lakh, with an announcement to this effect likely to be made in the interim Budget.

While Bhattacharya agreed that the interim Budget would make higher allocations to finance the enhanced welfare measures listed out by Dhasmana, he emphasised that provisions would have to be made for the extended free food grain scheme in particular. In November, the Pradhan Mantri Garib Kalyan Anna Yojana, the free foodgrain scheme, was extended for five years at an estimated expenditure of Rs 11.80 trillion. The scheme was set to expire at the end of calendar year 2023.

Both Bhattacharya and Dhasmana’s assessment is also backed by foreign brokerage firm Jefferies, which has projected that the government will focus on boosting welfare spending in the upcoming interim Budget. According to the brokerage, this will align with Prime Minister Narendra Modi's campaigns on 'Modi’s guarantees'.

However, Jefferies thinks that the interim Budget could introduce a large new welfare scheme. Excluding subsidies, the brokerage anticipates a 7-8 per cent rise in the government’s social spending in FY25, compared to 3 per cent in FY24.

While Dhasmana has already outlined the fiscal implications, enhanced welfare spending will also have an effect on how the government raises revenues.

On the topic, A K Bhattacharya had this to say:

• Enhanced allocation for welfare schemes will create some pressure on govt revenues
• Interim Budget may indicate non-tax measures for FY25 to fund these schemes
• These could include more privatisation, disinvestment and asset monetisation
• Interim Budget unlikely to see any major tax measures
• Govt likely to rely on prevailing tax buoyancy to fund welfare schemes  

For its part, Jefferies does not expect immediate tax hikes for raising revenues amid increased welfare spending. But, measures such as higher capital gains tax are possible after the election. The brokerage also sees a potential increase in disinvestment after the polls, with the government capitalising on the sharp rise in railways and defence PSU stocks.

Business Standard's A K Bhattacharya concluded that the government would not compromise with its fiscal consolidation plan even if it increased welfare expenditure. We will have to wait for the full Budget in July 2024 after the Lok Sabha elections for more details on how this increased spending will be financed.