Don’t expect Budget FY24 to deliver anything dramatic, but watch out for the signalling it will provide
The existence of high inflation through the last three years would mean that taxpayers have not really been compensated in any way. (IE)
As is normally the case with budgets, the one for FY24 will be watched closely, more so because it would have to address several issues as things normalise in the economy. While the overall size of the budget based on the revenue expectations and expenditures and the resulting borrowings would set the contours, managing other objectives would be important. There are several issues that would be addressed this time.
The first consideration will be the elections in 2024. The political economy of a budget is always compelling. While taking a higher view, as economists do, is of academic interest, governments are run by politicians who, in turn, come to power based on certain promises to the electorate or seek to reach out to it through visible action. Therefore, practically speaking, budgets have to make allowances for this aspect of political economy. While the government can change the names of programmes and repackage existing schemes, the overall allocations would be important constraints.
Second, the existence of high inflation through the last three years would mean that taxpayers have not really been compensated in any way. Normally, budgets do not address these concerns as there are no lobby groups, and the approach over the years is tokenism through minor sops. Just before the pandemic, two alternative tax regimes were provided, but the new one, which excludes all deductions, found few takers. Combine this consideration with the first, and there will be expectations of some concrete concessions. Removing tax on interest on fixed deposits is high on the list because it addresses the issue of declining financial savings as well as puts them on the same level as debt mutual funds.
Third, the government had gone in for some liberal cash and food transfers to the poor in the past, which will be reviewed. These are hard decisions to take in a pre-election year. But all ‘freebies’ are hard to withdraw, especially because when they are announced, the tenure is rarely mentioned. The free food scheme has been merged with the regular PDS system, which is a pre-budget step taken. But what about the fertiliser subsidy, which has been at its highest level, given the global developments? While the economy appears to be better off today, the lower strata of society have been affected by inflation, and employment creation still requires support. Therefore, this will be watched with some interest.
Fourth, the disinvestment path will provide a clue into the government’s ideology as well as the practical side of garnering funds. The problem with divestment is that the beginning is always good when profitable companies can be partly sold with fair valuations. But over time, it becomes a challenge, as has been seen with the largest life insurer, where the market valuation post listing has been unfavourable. The oil sector, too, is in a state of flux and has been pushed to the sidelines for quite some time. The same holds for banks where the finance minister has spoken of two of them being fully sold. The budget will provide clues on all these aspects, besides being realistic in the target posited. The asset sale of PSUs will be a work-in-progress, though the proceeds will not enter the budget but will be realised by the companies.
Fifth, the overall growth projections will be of interest as it clears the picture of how the government sees the economy faring. The past year has turned out better, with lower real growth but higher nominal growth due to high inflation. For FY24, one expects both real growth and inflation to come down. This would be deduced from the nominal numbers assumed in the calculations. Further, the nominal GDP growth rate would also have a bearing on the assumed growth in tax collection numbers.
Sixth, there are also expectations that the budget will increase certain impost, but get them as cesses or surcharges, as was done last year. This will be the unknown, given that the GST structure is outside the purview of the budget. Raising taxes would also mean sharing the same with the states as per the rules laid down by the Finance Commission. The tendency in the recent past has been that the cess/surcharge route has been used to ensure that the revenue stays with the Centre.
Seventh is the capex of the government. This has been the talking point all through, and while it is the job of the private sector to invest, the onus invariably falls on the Centre, given that states have constraints in the form of the fiscal deficit ratio.
Here, the major constraint is on how much money is left for such discretionary expenditure after other commitments are met. Last year the number of Rs 7.5 trillion included Rs 1 trillion given to states, and hence, the Centre was to spend only Rs 6.5 trillion. Defence capex was Rs 1.6 trillion, and given the border issues, would have to be scaled up this year.
Last would be the level of fiscal deficit ratio. The Centre has the luxury of not really having a strict limit, unlike the states.
Therefore, the number per se is a goal that partly reveals the ideology of the government. It is widely expected that the ratio will be brought down to the region of 5.5%.
The disadvantage is that the denominator will be less buoyant for sure, and hence, there has to be control on the numerator front. This deficit number will set the tone of the gross borrowing programme of the government for the year, which the markets will be watching very closely.
Hence, the budget will provide a lot of signaling for the coming year, but nothing really dramatic may be expected from it.
The writer is chief economist, Bank of Baroda
Views are personal