The Union Budget 2024, the first under the third Narendra Modi government, was expected to announce measures to spur consumption and jobs on the one hand, but while doing so one wondered if the government would deviate from its fiscal consolidation roadmap. In the end, the budget runs a tightrope walk.
On the one hand, it maintained its thrust on capital expenditure with an outlay of Rs 11.11 lakh crore or 3.4 per cent of GDP. It also announced various schemes and initiatives to facilitate employment, skilling and other opportunities for 4.1 crore youth over a five-year period, with a central outlay of Rs 2 lakh crore.
But, while doing so, it has also maintained its fiscal consolidation path.
In fact, for 2024-25, the finance minister projected a fiscal deficit of 4.9 per cent of GDP, which is lower than the 5.1 per cent target of the interim budget.
"The fiscal consolidation path announced by me in 2021 has served our economy very well, and we aim to reach a deficit below 4.5 per cent next year. The Government is committed to staying the course," said FM Nirmala Sitharaman.
From 2026-27 onwards, the endeavour will be to keep the fiscal deficit each year such that the central government debt will be on a declining path as a percentage of GDP, added Sitharaman.
"Faced by a trade-off between fiscal consolidation and expectations for measures to boost demand, the FY25 budget struck a fine balance by continuing to consolidated finances, while also tackling social sector demands, with a focus on saving over spending," pointed Radhika Rao, executive director and senior economist at DBS Bank.
Robust tax revenues and a record surplus transfer of Rs 2.11 lakh crore by the Reserve Bank of India have helped the government maintain its fiscal path. For 2024-25, the FM has estimated net tax receipts at Rs 25.83 lakh crore.
Net market borrowing this year is estimated at Rs 11.63 lakh crore, which will be less than the previous year.
"Interestingly, the new medium-term fiscal consolidation path has been linked to a reduction in the debt/GDP ratio instead of continued compression of the fiscal deficit /GDP ratio. This will allow the government flexibility to chart an appropriate fiscal course that builds in higher capital spending as well as support to meeting the climate goals in a fairly uncertain global environment," noted Aditi Nayar, chief economist, head of research and outreach at rating agency ICRA.
Reduced government borrowings should facilitate the reduction in policy interest rates and encourage private investment, feels D.K. Srivastava, chief policy advisor, EY India.
"The emphasis on fiscal consolidation implies reaching the FRBM target of 3 per cent of GDP by 2027-28 with an annual correction of 0.7 percentage points in the next two years, followed by 0.5 percentage points in 2027-28. In the medium term, therefore, the private sector would be progressively facilitated to increase its investment demand," said Srivastava.
The shift to a new medium-term fiscal consolidation path linked to a reduction in central government debt as a per cent of GDP will give the government greater flexibility to decide on an appropriate fiscal trajectory based on domestic and global growth dynamics, said Tanvee Gupta Jain, chief India economist at UBS.
"Considering the Indian economy has been in a sweet spot lately, we believe pursuing counter-cyclical fiscal policy should help strengthen India's macroeconomic stability and create a foundation for strong medium-term growth," she said.
UBS expects a sovereign rating upgrade for India (currently rated at the lowest investment grade) by at least one of the three rating agencies over the next 18-24 months.
