The article was published in today’s editorial of The Hindu Newspaper. The article talks about the budget which is about to be laid by the newly elected government on 23rd July.
Table of Contents
Background Information
To understand the article, we must first understand some basic economic terms.
Budget
A budget is a financial plan that estimates revenue and expenses over a specific period, typically a fiscal year. Governments use budgets to allocate resources, manage finances, and plan for future expenditures.
Interim Budget
An interim budget is a financial statement presented by the government for a temporary period, usually when there is not enough time to present a full annual budget. This often happens when there is a change in government or an election is impending. It allows the government to continue functioning by authorizing necessary expenditures until the full budget is presented.
Gross Domestic Product (GDP)
Gross Domestic Product (GDP) is the total value of all goods and services produced within a country’s borders over a specific period, typically a year. It is a key indicator of a country’s economic performance and health. GDP can be measured using production, income, and expenditure.
Gross Fixed Capital Formation (GFCF)
Gross Fixed Capital Formation (GFCF) refers to the net investment in physical assets such as buildings, machinery, and equipment. It is a component of GDP and indicates the level of investment in an economy, reflecting its capacity for future growth and production.
Gross Capital Formation (GCF)
Gross Capital Formation (GCF) encompasses all investments in fixed assets and inventories. It includes GFCF and changes in inventories, representing the total investment in physical assets and stockpiling by businesses.
Gross National Disposable Income (GNDI)
Gross National Disposable Income (GNDI) is the total income available to a nation for spending or saving after accounting for net income from abroad (such as remittances and foreign aid). It includes GDP plus net income received from other countries (e.g., interest, dividends) and net transfers from abroad.
These economic indicators and terms are vital for understanding the financial and economic health of a country, influencing policy decisions, and guiding economic planning.
Net Exports
Net exports are the difference between a country’s total exports and total imports and can be positive (a trade surplus) or negative (a trade deficit).
Service Exports
Service exports include intangible products like tourism and financial services, while goods exports are tangible products like manufactured goods and agricultural products. Understanding these terms helps in analyzing a country’s trade performance and its impact on the overall economy.
Tax and Non-Tax Revenue
Tax revenues serve as the lifeblood of governments, providing essential funds for public services and investments. These revenues are collected from individuals and businesses through various channels, such as income tax, sales tax, property tax, excise tax, customs duties, and payroll taxes. On the other hand, non-tax revenues are derived from sources outside of traditional taxation, including fees and charges, fines and penalties, dividends and profits, rents and royalties, grants and aid, and miscellaneous receipts. This diverse revenue mix allows governments to meet their financial obligations and deliver essential services to the public. For instance, in a hypothetical scenario, tax revenues amount to $640 billion, while non-tax revenues total $50 billion, demonstrating the significant contribution of both revenue streams to the government’s overall financial capability.
ARTICLE EXPLANATION
The final Budget for 2024-25, due on July 23, will be India’s first budget of Modi 3.0, focusing on medium-term growth and employment. The government will rely on domestic growth drivers due to the global economic slowdown. The short-term objective is to achieve a minimum of 7% growth, while the medium-term goal is to sustain a real GDP growth rate between 7%-7.5%. This will be achieved by reducing the fiscal deficit relative to GDP to a consistent level of 3% in the next three to four years. The employment objective is not independent of the growth objective.
Investments and Savings Prospects
To achieve a 7% plus growth, a real investment rate of 35% is needed. The latest data for 2023-24 shows a real investment rate of 33.3 for 2022-23 and 33.5 for 2023-24. To sustain a growth of 7% plus, a level of GFCF at 35% or so is needed in the medium term. The saving to GDP ratio in nominal and real terms was 30.2% and 32.8% in 2022-23. Marginal upward adjustments are needed in savings and investment rates to achieve this level. The household sector’s financial savings have decreased to 5.2% of Gross National Disposable Income for 2022-23, indicating a need to increase the rate to provide access to investible surplus at reasonable rates for the private sector, as this also contributes to foreign capital inflow. India’s net export contribution to GDP growth has remained negative due to subdued export prospects, with 0.5% points in 2022-23 and -2.0% points in 2023-24. Indian service exports are expected to perform better than goods exports, which contracted in 2023-24. Until export demand increases and private investment gains momentum, India will rely on government investment demand for growth support.
Budgetary Options
This passage provides an overview of the expected financial situation and budgetary measures for the Indian government in the fiscal years 2023-24 and 2024-25. Here is a breakdown of the key points:
Revenue Improvement
- The government’s revenue position is expected to improve due to increased tax and non-tax revenues.
- Gross tax revenues (GTR) for 2023-24 are expected to exceed the revised estimates by ₹27,581 crore.
- Economic Growth and Inflation:
- A nominal GDP growth of at least 11% is projected for 2024-25.
- There is an anticipated rise in inflation based on the Wholesale Price Index (WPI).
- Gross Tax Revenue (GTR) Projections:
- With a tax buoyancy of 1.1 (meaning tax revenue grows by 1.1 times the GDP growth rate) and a GTR growth of 12.1%, the GTR is expected to reach ₹38.8 lakh crore.
- After distributing the states’ share of central taxes, the net tax revenue for the Centre would be ₹26.4 lakh crore.
- Non-Tax Revenues:
- The Reserve Bank of India’s augmented dividends of ₹2.11 lakh crore are expected to boost non-tax revenues, surpassing the interim Budget estimates.
- The Centre’s non-tax revenues are expected to exceed ₹5 lakh crore.
- Impact on Monetary Policy:
- Any transfer from the RBI to the government will have an expansionary effect, impacting monetary policy.
- Government’s Fiscal Deficit and Expenditure:
- The interim Budget outlines a fiscal deficit to GDP ratio of 5.1%.
- This allows for a total expenditure of ₹49 lakh crore, which includes non-debt capital receipts.
- Expenditure Breakdown:
- Revenue expenditure for 2024-25 is projected to be 4.6% higher than the actuals for 2023-24. This could increase due to higher subsidies, health expenditures, and allocations for the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
- If revenue expenditure growth is increased to 8%, it would add close to ₹3 lakh crore over 2023-24.
Capital Expenditure:
- There is room for capital expenditure growth of 19.2% in 2024-25, which will support investment demand and infrastructure expansion.
Policy Measures:
- Tax rationalization measures may be undertaken.
- The Production Linked Incentive (PLI) scheme may be expanded to support employment generation.
In summary, the government’s revenue position is expected to improve significantly due to higher tax and non-tax revenues. This will allow for increased spending on both revenue and capital expenditures, supporting economic growth, investment demand, and infrastructure expansion.
Commit to FRBM targets
The Budget should aim for growth and stability, encompassing price and scale stability. It is crucial to commit to FRBM targets in the short to medium term. If the fiscal deficit to GDP ratio is reduced to 5.1% in 2024-25, it may take three to four years to reach 3% of GDP. Maintaining nominal GDP growth between 11%-11.5% will reduce the debt GDP ratio and interest payment to revenue receipts ratio, creating a virtuous cycle.
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