GS Paper III

News Excerpt:

The 2024-25 interim Budget emphasises fiscal correction, increased capital expenditures, and aims to lower the fiscal deficit.

More details on news:

• The interim budget by the finance minister distinctly underscores the government’s commitment to fiscal consolidation. 
• The interim Budget for 2024-25, emphasises maintaining the fiscal deficit at 5.1%, a decrease of 0.7% points.
•  This has to be 3% of GDP for the Central government and not 4.5% of GDP. Together with State governments, the target fiscal deficit can be 6% of GDP. 
• The Budget is not considered as overstretched. The buoyancy of tax revenue comes to 1.33, if the base is taken as Budget Estimates of the present year and using nominal GDP growth for 2023-24 as per the National Statistics Organisation’s (NSO) first advance estimates.
•  The government needs to set a target fiscal deficit relative to GDP and the time horizon over which this target is achieved. The goal must be to get to a fiscal deficit of 3% of GDP each for the Centre and the States.

Emphasis on Capital expenditure

The interim budget highlighted the significance of capital expenditure for 2024-25. It emphasises a continued focus on increasing capital expenditures by the Central government which can be seen in following ways:

• The interim Budget has maintained this trend and has provided for an increase of 11.1% in capital expenditures when a comparison is made with the 2023-24 Budget Estimates.
• The capital expenditure growth is lower than what was budgeted in 2023-24. As per the Revised Estimates, the growth in capital expenditure is 28.4% instead of the budgeted growth of 37.4%.
• This lower capital expenditure growth is associated with a real GDP growth of 7.3% in 2023-24. Thus, it may be possible for a 17% capital expenditure growth in 2024-25 to enable a real GDP growth of 7% provided private sector investment picks up and the momentum of capital expenditure growth of State governments is maintained as in the current year.
• The capital expenditures of the Central government in 2024-25 as a proportion of GDP are budgeted to increase marginally from 3.2% in 2023-24 to 3.4% in 2024-25.
• In developing economies, growth is driven by investment. For the continued growth of the economy at 7%, India needs an investment rate of 35%. This is on the assumption of an Incremental Capital Output Ratio (ICOR) of 5.

Declining Household saving

• The fiscal consolidation plan is linked to household savings in financial assets and a net inflow of resources from abroad. The household sector is the only surplus sector in the economy.
• The surplus of this sector needs to feed the public sector as well as the private corporate sector.
• If the household savings in financial assets were increasing, it may be possible to make some adjustments to the desired level of fiscal deficit. However, recent numbers show household savings in financial assets going down.

Target to minimize debt-GDP ratio

•  The committee that was appointed to look at the Fiscal Responsibility and Budget Management (FRBM) Act, 2003 wanted that the debt-GDP ratio of the Centre and States taken together should not exceed 60%.
• For the Centre, the target level was indicated at 40%. There is no clear logic for this number if the Centre’s target fiscal deficit is kept at 3% of GDP.
• The corresponding level of Centre’s debt would be 30% of GDP with an underlying nominal growth of 11.1%.
• Simulations indicate that given the current consolidation path, if a 3% fiscal deficit is reached by 2028-29 and maintained at this level thereafter while sustaining a nominal GDP growth of 11.1%, a 40% debt-GDP ratio for the Centre would be reached by 2034-35.

Conclusion: 

The interim Budget for 2024-25 demonstrates a commendable focus on fiscal correction, capital expenditure, and consolidation. The planned reduction in the fiscal deficit and the commitment to reaching a target for both the Central government and States, if executed effectively, signals a positive trajectory towards economic stability and sustainable growth.