Fiscal deficit, external headwinds on FM’s agenda
FINANCE Minister Nirmala Sitharaman will be presenting the interim Budget for 2024-25; it will be effective only till a new government takes over after the General Elections later this year. Yet, she is likely to take a more long-term perspective while formulating her proposals, given the general expectation that the ruling NDA will retain power. Pre-poll surveys are leaning heavily in favour of the incumbent coalition led by the BJP.
Two issues will be on top of the Finance Minister’s agenda — the need to contain the fiscal deficit and to ensure that the economy remains insulated from the slings and arrows of external headwinds.
On the fiscal deficit target, which was kept at 5.9 per cent for 2023-24, there may be little variation in the light of robust revenue collections over the past year. Indirect revenues via the Goods and Services Tax (GST) regime have been consistently higher than projected over the past year. The latest data shows these touched Rs 1.65 lakh crore in December 2023 — over 10 per cent higher than the corresponding period in 2022. This may be the lowest over the past three months, but the collections are still buoyant.
Direct taxes have also shown a healthy growth during the year, with the official data showing an over 18 per cent rise in net corporate tax collections and personal income inflows are even higher. At the same time, outlays on infrastructure as well as on critical social welfare schemes, like free foodgrains, will also be making a dent in the Budget. The subsidy bill for the current financial year has largely been on account of food and fertilisers. In the case of food, the bill is set to rise with the implementation of the Pradhan Mantri Garib Kalyan Anna Yojana with effect from this month. In contrast, the outlay on fertiliser subsidy may plateau as global prices have fallen in recent months.
With this sizable revenue inflow, the Finance Ministry seems confident of meeting the fiscal deficit target despite the recently released data from the National Statistical Organisation (NSO) projecting a slower growth of nominal GDP as compared to budget estimates. It has projected the nominal GDP growth to expand by 8.9 per cent rather than 10.5 per cent.
Yet, the same data indicates that the economy is recovering from the ravages of the pandemic and the impact of geopolitical tensions. The estimate of 7.6 per cent growth in the second quarter (July to September), following 7.8 per cent in the first quarter, has given rise to projections of a better performance than anticipated in 2023-24. Overall, the growth is now likely to be around 7 per cent, higher than earlier expectations of 6.5 per cent.
While the rising growth path is encouraging, the Finance Minister will have to ensure that the impetus to the economy continues unabated in 2024-25.
External headwinds remain the greatest threat to this objective and could well create a roadblock in pushing growth. Till now, India has remained a surprising outlier in a recession-hit global economy. Only the US and Japan have shown similar resilience in the face of the ripple effects of geopolitical events in Ukraine and West Asia.
Despite the disruption of global supply chains after the onset of the Ukraine war in February 2022, India was able to contain inflation and revive the manufacturing and services sectors to reach 7.2 per cent growth in the last fiscal. The spike in global oil prices had been an initial worry, but the offer of Russian oil at discounted prices helped keep the foreign exchange outflow within manageable limits. The softening trend in markets worldwide in 2023 came as a relief as this reduces the burden for a country that imports over 85 per cent of its fuel requirements.
There are fresh challenges on the horizon, however, as the Yemen-based Houthi rebels are continuing their depredations on merchant shipping going through the Red Sea. The prospects of the war between Hamas and Israel widening have increased, with recent reprisals by the US and its allies on Houthi bases in Yemen. It has been followed by Houthi attacks on US-flagged oil tankers.
Even if the war remains contained to West Asia, the blockage of the Suez Canal route due to the conflict will have a serious impact on India’s exports to Europe and the US. Freight rates have already shot up, making Indian goods more expensive. This comes at a time when exports have already slowed down in the current fiscal owing to falling demand in the recession-hit Eurozone and other key markets.
The interim Budget will, thus, have to deal with issues that are more long-term, especially with regard to geopolitical fissures. On the domestic front, the slowdown in agricultural growth as well as reports of rural consumption lagging behind urban areas will have to be taken into account while formulating proposals.
On the external front, the policy of diversifying sources of critical crude oil purchases must be continued to ensure energy security. Exports may also need a special support to deal with potential supply route disruptions.
Most important, the Budget proposals will have to ensure that India becomes a more attractive destination for investments by making it easy to do business here. It is still a difficult environment for investors, despite all the changes made in recent years. The task is to push growth to even higher levels of 8 to 9 per cent that are needed to pull the country out of poverty. It is a tough job for any Finance Minister.
