Mumbai - In the lead-up to the Interim Budget of 2024, amidst tumultuous stock markets and looming general elections, a myriad of global and domestic challenges weigh heavily on India's economic landscape. Geopolitical uncertainties, exacerbated by war and energy price volatility with Brent oil reaching $78.51 per barrel, along with disruptions in shipping routes and delays, add to the macroeconomic uncertainties and stock market fluctuations.
Scheduled to unveil the interim Budget for the fiscal year 2024-25 on February 1, Finance Minister Nirmala Sitharaman is expected to unveil a range of initiatives. The measures are poised to stimulate consumption, introduce reform policies to ensure equitable conditions among manufacturers, strategically allocate funds to propel infrastructure development, and place a distinct emphasis on the agricultural sector.
India’s Finance Minister faces the task of bolstering investor confidence while navigating the calculus required to secure voter consent in the upcoming elections, extending beyond the scope of a mere Interim Budget.
Internally, India is undergoing a fiscal paradigm shift, grappling with challenges posed by Artificial Intelligence, the climate crisis, and geopolitical tensions. Genuine concerns about job scarcity, the risks associated with new digital financial systems, and the looming climate crisis prompted India's participation in discussions on a multilateral regulatory framework at the recent World Economic Forum in Davos.
The Finance Ministry is compelled to steer India towards a new fiscal policy that accommodates these challenges while remaining on the path of economic recovery. Fiscal consolidation takes center stage, with the fiscal deficit target for FY25 expected to hover around 5.2-5.5 percent due to weaker nominal GDP growth and disinvestment shortfalls. The roadmap aims to achieve a fiscal deficit to GDP ratio of 4.5 percent by 2025-26, necessitating a realistic projection of disinvestment proceeds to maintain budget credibility.
However there is optimism in tax buoyancy, with higher tax and non-tax revenues exceeding projections. The focus remains on capital expenditure (capex) as a key driver of economic growth, particularly in infrastructure development. However, achieving a fiscal deficit to GDP ratio of 5.9 percent for FY24 proves challenging, given disinvestment gaps and rising expenditure, primarily in subsidies. The Interim Budget is expected to strike a delicate balance, avoiding major tax announcements but possibly introducing targeted exemptions, such as a differential tax limit for women, to appeal to the middle-class female voters.
Maintaining budget credibility becomes paramount, with a continued emphasis on capex in defense, roads, and railways. Support for state governments through fiscal transfers for capex is crucial, and the allocation for interest-free 50-year loans to states may be maintained. The intricate link between global headwinds, central bank decisions, and the budget's arithmetic warrants careful analysis, especially considering the anticipated interest rate hike by the US Fed Reserve.
Despite external challenges, India's deficit financing primarily relies on internal borrowing, mitigating external financing risks. However, the Reserve Bank of India's interest rate policies can impact debt servicing costs. The volatile global scenario necessitates a formal revision of fiscal deficit-GDP thresholds, addressing uncertainties in Centre-State financial relations. Amidst geopolitical fragility and disruptions in global supply chains, maintaining food security measures for the vulnerable is deemed crucial.
The fiscal narrative extends beyond numerical parameters to encompass macro-fiscal considerations, including public debt to GDP ratio, revenue deficit, and interest payments to revenue receipts ratio. To pre-empt concerns of populist announcements, aligning social infrastructure announcements with Public Financial Management tools like gender and climate-responsive budgeting is suggested.