Post-Election Fiscal Optimism
Following India’s general elections, the anticipation for the unveiling of the full FY2025 budget in July 2024 has intensified. The fiscal landscape appears promising, with several revenue streams exceeding expectations since the Interim Budget.
Robust Revenue Performance
Provisional data from the Controller General of Accounts (CGA) reveals that the Government of India’s (GoI) gross tax revenue for FY2024 surpassed the Revised Estimates (RE) by ₹276 billion. This outperformance suggests that the projected growth in the FY2025 Interim Budget Estimates (IBE) is conservative. With nominal GDP expected to grow by 10.8%, there’s room to anticipate higher tax revenues in FY2025, potentially exceeding the IBE by ₹200 billion.
Unexpected Windfall from RBI Dividend
A significant boost to revenue comes from the Reserve Bank of India’s (RBI) unexpectedly substantial dividend payout of ₹2.1 trillion to the GoI. This considerably surpasses the IBE of ₹1.0 trillion for dividends from the RBI, nationalized banks, and financial institutions. The resulting surplus of at least ₹1.0 trillion will likely lead to a significant upward revision in non-tax revenue estimates in the final budget.
Leveraging the Surplus
The combined surplus from tax and non-tax receipts, amounting to ₹1.2 trillion, presents the GoI with flexibility. It can allocate these funds towards increased expenditures, accelerate fiscal consolidation beyond the Interim Budget’s projections, or adopt a combination of both strategies. The chosen approach will be closely observed.
Capital Expenditure Challenges and Revex Focus
While increasing the capital expenditure (capex) target of ₹11.1 trillion for FY2025 seems enticing, it may be difficult to achieve due to slower project execution in Q1 FY2025 and the typical slowdown during monsoon months. Achieving the IBE for capex would require a sharp increase in the monthly run-rate in the latter half of FY2025.
Additionally, the ₹0.7 trillion allocated for ‘new schemes’ under the finance ministry capex in the FY2025 IBE is likely a placeholder. It is expected to be distributed among various ministries, increasing their individual capex without impacting the aggregate figure.
With revenue spending experiencing a modest increase in FY2024, there’s potential for higher expenditure on the revenue side, possibly through new schemes or increased outlays for existing ones. Given the sluggish rural demand due to the inadequate 2023 monsoon, additional revenue expenditure (revex) is expected to be directed towards rural areas.
Balancing Growth and Consolidation
A potential 50:50 split of the ₹1.2 trillion surplus, with ₹600 billion allocated to revex and the remaining amount for deficit reduction, would elevate the growth in non-interest non-subsidy revex to 6.3% from the 3.3% in the FY2025 IBE. This growth rate would surpass the average of 1.7% witnessed in the past two years.
Such a distribution could also reduce the GoI’s fiscal deficit to 5.0% of GDP, surpassing the 5.1% target in the IBE. This would likely translate to reduced government security (G-sec) issuances in H2 FY2025, positively impacting G-sec yields and borrowing costs.
Favorable Outlook and Future Challenges
The current fiscal situation appears favorable, with positive fiscal dynamics and a balanced demand-supply scenario for G-secs. However, further fiscal consolidation beyond FY2025 could prove challenging without positive developments on the revenue front. The GoI’s upcoming medium-term fiscal targets will provide clarity on fiscal goals and the pace of consolidation beyond FY2026.
Sunil Garnayak is an expert in Indian news with extensive knowledge of the nation’s political, social, and economic landscape and international relations. With years of experience in journalism, Sunil delivers in-depth analysis and accurate reporting that keeps readers informed about the latest developments in India. His commitment to factual accuracy and nuanced storytelling ensures that his articles provide valuable insights into the country’s most pressing issues.
