Dr. Sunil Kumar Sinha, Principal Economist at India Ratings and Research, a Fitch Group company, plays a pivotal role in delivering precise and timely insights into India’s credit markets. In an exclusive conversation with The Interview World, Dr. Sinha provides a comprehensive analysis of various facets of the interim Union Budget 2024, offering valuable perspectives.
Dr. Sinha extensively discusses the budget’s primary focus on agriculture and the rural economy, unraveling the intricacies of strategies aimed at addressing challenges in these vital sectors. Furthermore, he delves into the detailed aspects of revenue expenditure, capital expenditure (capex), fiscal consolidation, and the expected market reactions.
The interview is a treasure trove of key highlights that unravel the complexities of the interim Union Budget, providing a nuanced understanding of the economic landscape and the government’s priorities for the upcoming fiscal year.
Q: How does the Interim Union Budget 2024 aim to tackle and manage the fiscal deficit, and what are your opinions on the effectiveness of the proposed measures?
A: The Union government has strategically set the fiscal deficit for FY24 at 5.8% of GDP, slightly below the initially budgeted 5.9%, despite facing challenges like a lower nominal GDP. Looking ahead to FY25, the fiscal deficit is projected to be 5.1% of GDP. This deliberate approach also indicates the government’s steadfast commitment to achieving a fiscal deficit target of 4.5% of GDP in FY26.
Such precise fiscal planning not only strengthens the government’s credibility in managing finances but also fosters increased confidence among global investors in the Indian economy. This is particularly noteworthy considering India’s recent inclusion in JP Morgan’s Government Bond Index-Emerging Markets, highlighting the country’s attractiveness to international investors.
Q: What measures does the budget incorporate to effectively tackle the challenges faced by the agricultural sector and rural economy?
A: The government has redirected its attention towards the agriculture and rural economy to address the imbalances resulting from the ongoing economic growth. Despite the sustained economic progress, the consumption patterns reveal a bias towards households in the higher income brackets and those residing in urban areas.
While the budget did not propose an increase in the funds allocated to farmers through the Direct Benefit Transfer scheme of ‘Garib Kalyan,’ it did introduce several noteworthy initiatives. Furthermore, these include the construction of an additional 20 million houses over the next five years under PM Awas Yojana (Grameen), the development of a comprehensive program to support dairy farmers, an increase in aquaculture productivity from 3 to 5 tonnes per hectare, and the formulation of a strategy to achieve self-sufficiency in oil seeds production.
I anticipate that these measures will not only contribute to the creation of more employment opportunities in rural areas but also diversify and strengthen agricultural and rural incomes.
Q: What key patterns or trends can be discerned from the government’s revenue expenditure in the budget?
A: The projected revenue expenditure for FY25 stands at Rs. 36.55 trillion, reflecting a 2.52% increase over the revised estimate (RE) of FY24. In comparison, the RE for FY24 amounted to Rs. 35.40 trillion, surpassing the FY24 budgeted estimate (BE) by Rs. 381 billion. Moreover, this discrepancy was primarily attributed to the union government introducing supplementary demands for grants, resulting in an additional cash outgo of Rs. 583.8 billion.
The significant surge in revenue expenditure during FY24 (RE) was primarily driven by elevated spending on fertilizer/food subsidies and the Mahatma Gandhi National Rural Employment Guarantee Program. Consequently, the total subsidy for FY24 (RE) exceeded the FY24 (BE) by Rs. 374.53 billion. Given the pivotal role of government expenditure in shaping consumption demand, an increase in non-interest and non-subsidy revenue expenditure has the potential to elevate aggregate demand in the economy.
Despite this, the rise in non-interest and non-subsidy revenue expenditure during FY24 (RE) amounted to just Rs. 251.94 billion over FY24 (BE).
Q: How do you perceive the significance and impact of capital expenditure within the budget?
A: The interim budget for FY25 underscores the government’s sustained commitment to capital expenditure (capex), evident in the allocation of Rs. 11.1 trillion, marking a substantial 16.9% increase from FY24 (revised estimate: Rs. 9.5 trillion). This boost translates into a capex-to-GDP ratio of 3.4% for FY25, compared to the FY24 (RE) ratio of 3.2%.
Beyond merely supporting demand in the economy, this increased capex aims to foster growth by bolstering India’s productive capacity. Notably, there’s a significant development as, after a decade-long hiatus, the private sector’s greenfield capex seems to be gaining momentum. This positive shift is discernible in a recent RBI study on project finance lending. Anticipating a more substantial uptick in private sector capex, the union government endeavors to rationalize its capex growth in the upcoming years to align with fiscal deficit targets.
The allocation of capex is predominantly concentrated in two key ministries: railways and road transport & highways. Together, these ministries account for a substantial 47.18% of the capital account expenditure. Additionally, noteworthy capex provisions are observed in other ministries and departments in the FY25 budget, including defense, telecommunications, housing and urban affairs, and petroleum and natural gas.
Q: What methods and key factors should be considered when conducting a comprehensive analysis of the fiscal arithmetic within a budget, specifically focusing on aspects such as tax collection and revenue expenditure?
A: The FY25 budget’s fiscal projections underscore a seemingly plausible nominal GDP growth rate of 10.5%. This expectation aligns with a real GDP growth anticipated to fall within the 6.5%-7.0% range and a GDP deflator growth rate ranging from 3.3% to 3.8%. Interestingly, the average GDP deflator growth from FY14 to FY21 stood at 3.8%.
Looking at expenditure dynamics, the budget outlines a reduction in total expenditure/GDP to 14.54% for FY25 (BE), down from 15.14% in FY24 (RE) and 15.41% in FY23. Interestingly, the revenue expenditure/GDP for FY25 (BE) at 11.15% is near the pre-pandemic levels of FY20 (11.69%). The fiscal response to the COVID-19 impact necessitated an increase in the revenue expenditure/GDP ratio in FY21, FY22, and FY23 to 15.55%, 13.64%, and 12.69%, respectively.
In recent years, the government has consistently outperformed its revenue collection targets, especially in tax collections. Even for FY25, the union budget anticipates a robust 11.9% year-on-year growth in tax collections (FY24 BE: 11.6%). While the budgeted tax revenue buoyancy for FY24 was 1.07x, the actual performance, as per FY24 RE, exceeded expectations at 1.19x.
Despite the inherent challenges, achieving the fiscal deficit target of 5.1% of GDP in FY25 appears plausible. The government has, surprisingly, consistently reported a better fiscal deficit/GDP ratio than initially budgeted in recent years. The cautious revenue estimates in the budget provide a cushion for any unforeseen expenditures or potential setbacks in disinvestments during FY25.
Q: Will the budget exert a positive influence on the market?
A: The union government has projected gross and net market borrowings for FY25 at Rs. 14.13 trillion and Rs. 11.75 trillion, respectively. (For FY24 (RE), the figures were Rs. 15.43 trillion and Rs. 11.80 trillion.) Additionally, the government proposes short-term borrowing, including 91-days, 182-days, and 364-days T-bills, at Rs. 500 billion, the same as in FY24 (BE), with FY24 (RE) recorded at Rs. 13.23 billion.
With the fiscal deficit and borrowing numbers seemingly within reach, I anticipate that the FY25 budget will positively impact market sentiments.
The prospect of lower market borrowings, coupled with India’s inclusion in JP Morgan’s Government Bond Index-Emerging Markets, can ease 10-year G-sec yields in FY25. This development will not only enable the government to borrow at reduced costs but also decrease the capital market borrowing expenses for corporates, banks, and other financial institutions. Nevertheless, the persistence of robust credit demand, combined with a sustained liquidity deficit in the banking system, may continue to exert pressure on the yield of money market instruments.
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