Interim Budget 2024-25: Striking a middle path

Independent India has by now witnessed the presentation of 15 Interim Budgets. Of these, as many as eight were presented soon after the general elections by a newly elected government. An Interim Budget on those occasions became necessary because there was not enough time for the finance minister to put together a full budget for the entire year and get it approved by Parliament in time. The remaining seven Interim Budgets were presented before the general elections and hence became an easy instrument for the ruling party to use the Budget speech to ostensibly secure electoral gains.
 

But this Interim Budget, presented by Finance Minister Nirmala Sitharaman, made a bold attempt at striking a middle path.
Even though her 55-minute long address was just a paragraph short of the longest-ever Interim Budget speech (98 paragraphs) made by Piyush Goyal in February 2019, Ms Sitharaman adhered to the convention of not announcing any new tax measures or fresh schemes. Interestingly, her Budget speech did contain Part B, which is known for unveiling taxation measures. But, unlike a few direct tax changes in Part B of Mr Goyal’s Budget speech, she changed no tax rates, except extending by a year the tax exemptions and benefits that would have otherwise expired at the end of March 31, 2024.
 

There was, however, some relief for over 10 million taxpayers whose disputes with the government over tax dues would be settled — a move that could result in a substantial financial gain for middle-class Indians and create a feel-good factor. But she justified this move on the ground that this would improve both the ease of living and the ease of doing business, as well as make taxpayer services better. The total individual income-tax dues under dispute for over 10 years are estimated at over Rs 22,000 crore, although the actual benefit for taxpayers could be far less at about  Rs 3,500 crore.  Despite that, this  is an intelligent move as this would mean a good turn for the taxpayers without any effective loss to the exchequer.
 

Such prudence also seems to have influenced the Finance Minister’s fiscal consolidation efforts. Note that she has achieved a lower fiscal deficit number of 5.8 per cent of gross domestic product (GDP) for 2023-24, against the Budget Estimate of 5.9 per cent (in spite of a lower nominal size of the economy), largely on the strength of a one-off bonanza from the Reserve Bank of India through its higher dividend, which boosted the Centre’s non-tax revenue by 32 per cent in 2023-24. What also helped was a slower growth in capital expenditure at 28 per cent, instead of the budgeted increase of 33 per cent.
 

Along with prudence, Ms Sitharaman has continued to persist with transparent budgeting. There is no further recourse to extra-budgetary resources. Indeed, the accumulated extra-budgetary resources of about Rs 1.38 trillion, mobilised by the Budgets from 2016-17 to 2021-22, have been cleaned up and there has been no fresh recourse to such a device after 2021-22. Even the states’ accumulated tax dues from the Centre for the past several years (about Rs 7,150 crore) have been cleared even though this meant a lower increase in the Centre’s net tax revenues in 2023-24. Equally commendable has been the steady reduction in the government’s revenue deficit from 4.4 per cent of GDP in 2021-22 to 3.9 per cent last year and to 2.8 per cent in 2023-24.
 

A conservative approach is noticeable in two significant ways. One,  the Finance Minister has discarded the practice of setting an ambitious disinvestment target for the next year, perhaps after recognising that  the current year’s performance showed  an over 40 per cent shortfall  compared to the target.  Two, the Finance Minister has projected modest revenue numbers for 2024-25.  An increase of about 12 per cent in net tax revenues for the Centre  is as realistic as a 6 per cent growth in non-tax revenue for the next year. But what is more interesting is the way the goal of reducing the fiscal deficit is sought to be achieved, not through just revenue buoyancy but more through expenditure compression. Total expenditure is set to grow by only 6 per cent in 2024-25, down from a 7 per cent increase seen in 2023-24, and this compression is driven by a slowdown in capital expenditure growth to just 17 per cent, compared to 28 per cent growth in the current year. Equally interesting is the change in the expenditure composition. Revenue expenditure next year would grow by a slightly higher 3.25 per cent, up from the current year’s 2.5 per cent increase, while capital expenditure will slow down next year. Both the shifts in focus are significant.
 

An interesting facet of this Interim Budget is the way the Centre has not shied away from sharing with states the benefits of improved buoyancy in tax collections. Tax devolution to states in 2023-24 rose by over 16 per cent, due to the government decision to clear past dues, and is set to grow by 10 per cent next year. Even the central transfer of funds under various schemes to states went up by 15 per cent this year and would increase by 8 per cent next year. Some states may have gained more than others, but in a welcome development, Central transfers to states have maintained a healthy pace of growth.
 

There are, however, two concerns arising out of Ms Sitharaman’s Interim Budget. One, the Central government’s total debt continues to rule at an uncomfortably high level of 58.1 per cent of GDP in 2023-24 and would decline marginally to 57.2 per cent in 2024-25. The target, set out by the last official committee on fiscal consolidation, was 40 per cent of GDP,  and there is no clear path that has been laid out by the government to reach that goal. The finance ministry has sought recourse to the escape clause of the Fiscal Responsibility and Budget Management Act for following the targets set under the law. Instead of placing a medium-term expenditure framework, it has only reiterated the government’s commitment to meet the fiscal deficit target of 4.5 per cent of GDP by 2025-26.
 

Two, the finance minister has appeared to be a little conservative about allocations for a few important sectors. The outlay for defence for 2024-25 has seen hardly any increase over the current year’s spending. With geopolitical risks on the rise, the requirements of a higher defence outlay seem to have been ignored. More worrying is what appears to be under-provisioning for subsidies for food, fertiliser and even petroleum. Fiscal economists, only focused on deficit reduction, may welcome the decline in these subsidies in 2024-25 by almost 8 per cent. However, there could be serious questions on the feasibility of reducing subsidies on food, fertilisers and petroleum products in a year when pressure on prices of these commodities could upset these subsidy calculations.
 

Barring these concerns, Ms Sitharaman’s first Interim Budget is a welcome departure from at least the last few such initiatives unveiled before a general election. Even while announcing a series of achievements aimed at securing political gains for the ruling party at the forthcoming general elections, she has not allowed electoral compulsions to play havoc with government finances.