Full Budgets tend to realign fiscal deficits set in interim Budgets

Analysis of fiscal trends since 1991 reveals that full Budgets typically reduce fiscal and revenue deficits set in interim budgets, with notable exceptions during economic crises and major reforms

Finance minister Nirmala Sitharaman is all set to present her record seventh consecutive budget later this month. Having presented the interim Budget FY25 before the general elections, she will have the opportunity to revisit her fiscal math and rejig her revenue allocations. Whether she will pare down the fiscal deficit target of 5.1 per cent of gross domestic product (GDP) using the record dividend received from the Reserve Bank of India (RBI) or expand flagship government programs will be keenly watched.

In that context, a comparative analysis of interim and full budgets during election years since the 1991 reforms Budget by then finance minister Manmohan Singh has revealed that budgeted fiscal deficit (as a percentage of GDP) has either remained the same or declined in the full budget from the interim budget for that year, except in 2009-10 following the global financial crisis. 

Moreover, budgeted revenue deficit (as a percentage of GDP) has also seen a declining trend except 2009-10 and the 2019-20 budget, during the transition from interim to regular budget in an election year. Both trends have been witnessed, notwithstanding a change in political leadership.

Surajit Mazumdar, professor at Jawaharlal Nehru University, said that the interim budget of 2009-10 was placed just a few months after the outbreak of the global financial crisis, and it didn't fully factor in the fiscal impact of the recommendations of the 6th Pay Commission. “The implications of these events on fiscal parameters couldn’t be accounted for fully in the interim budget and by the time of the regular budget, the estimated GDP was lower while the imperatives of imparting a fiscal stimulus to the economy to counter the recessionary tendencies led to upward revisions in fiscal and revenue deficit,” he added.

A higher fiscal deficit is perceived negatively in public spheres and is the most talked-about economic indicator of the country. So, successive governments try to reduce the budgeted fiscal deficit when they get a chance to revisit the fiscal math in the full budget. If we compare the actual and the budgeted fiscal deficit (as a percentage of GDP) of all the years we have taken into consideration, then we observe that except 1998-99 and 2019-20, the fiscal deficit has either reduced or remained constant, thereby indicating that the governments were able to achieve their fiscal consolidation targets in the first year of forming the government. 

For example, in 2004-05, the budgeted fiscal deficit was 4.4 per cent of the GDP while the actual one came out to be 3.88 per cent of the GDP, denoting the highest reduction. However, in 1998-99, the actual fiscal deficit came out to be 6.29 per cent of GDP as against the budgeted figure of 5.1 per cent of GDP. Similarly, in 2019-20, the actual fiscal deficit was 4.64 per cent of GDP, which far exceeded the budgeted figure of 3.3 per cent of GDP. 

But one has to keep in mind that off-budget borrowings often allowed the government to show lesser fiscal deficit numbers until the 2020-21 Budget when the government started showing such financial liabilities in the Budget to give a more accurate picture of the government's fiscal position.

Budgeted Capital Expenditure (as a percentage of total expenditure) has always risen during the transition from interim to full budget, irrespective of a leadership change. This is because, by convention, governments refrain from announcing any high-profile schemes in the interim budget. Once a government comes to power, they announce their flagship schemes in the general budget, which increases the budgeted capex. The biggest increase in budgeted capital expenditure (as a percentage of total expenditure) was recorded in 2004-05, 1991-92, and 2009-10, respectively, when there was a coalition government in power.

Similarly, budgeted revenue expenditure (as a percentage of total expenditure) has always fallen, although marginally, during the transition period, but the biggest fall has been recorded in the years of 2004-05, 1991-92, and 2009-10, respectively.

Total expenditure has always seen an increasing trend during the transition phase, although the rise has been marginal. The highest rise in total expenditure has been witnessed in 2009-10 and 2004-05, which were both years of a coalition government coming into power. However, the same pattern is not visible in the coalition governments of the 1990s.

Interim and Final Budget

Items	1991-92 (I)	1991-92 (F)	1996-97 (I)	1996-97 (F)	1998-99 (I)	1998-99 (F)	2004-05 (I)	2004-05 (F)	2009-10 (I)	2009-10 (F)	2014-15 (I)	2014-15 (F)	2019-20 (I)	2019-20 (F)
Capital Expenditure (as a % of total expenditure)	26.15%	28.24%	NA	20.93%	NA	21.59%	16.76%	19.32%	11.03%	12.10%	12.08%	12.63%	12.07%	12.15%
Revenue Expenditure (as a % of total expenditure)	73.85%	71.76%	NA	79.07%	NA	78.41%	83.24%	80.68%	88.97%	87.90%	87.92%	87.37%	87.93%	87.85%
Fiscal Deficit (as a % of GDP)	5.80%	5.69% (5.49%)	5%	5% (4.7%)	6%	5.1% (6.29%)	4.40%	4.4% (3.88%)	5.50%	6.8% (6.46%)	4.10%	4.1% (4.1%)	3.40%	3.3% (4.64%)
Revenue Deficit (as a % of GDP)	2.68%	2.09%	NA	2.50%	NA	2.70%	2.90%	2.50%	4%	4.80%	3%	2.90%	2.20%	2.30%

Source: Finance ministry, BS Research