Shreya Sodhani, Regional Economist, Barclays, said, “While maintaining focus on capex, we think the government will use increased receipts to fund higher revenue spending, balancing economic and political needs.”
With Finance Minister Nirmala Sitharaman all set to present the Union Budget 2024 on July 23, economists at Barclays said that the government is expected to signal policy continuity, showcasing fiscal consolidation, however, with a marginal shift in spending mix. Shreya Sodhani, Regional Economist, Barclays, said, “While maintaining focus on capex, we think the government will use increased receipts to fund higher revenue spending, balancing economic and political needs.”
Two important developments that have taken place on the fiscal front are higher-than-projected tax revenues in the first quarter which may lead to the government increasing its tax collections estimates; and a high dividend of Rs 2.1 lakh crore announced by the RBI.
Per the analysis by Barclays, the Budget will balance economic imperatives with political ones. “In terms of the deficit, this would mean the government using the windfall from the RBI dividend and higher tax revenues to fund higher spending, rather than reducing the deficit from the interim budget estimate, which already suggested accelerated consolidation,” it said, while maintaining that the government is expected to stick to its target for the fiscal deficit to reach 4.5 per cent by FY25-26. In the interim Budget, the government had pegged the fiscal deficit of 5.1 per cent for the full fiscal. However, per sources, the government might reduce it to 5 per cent in the full Budget for FY25.
Barclays expects spending to be raised by approximately 3.6 per cent from the interim Budget. “The share of capital expenditure in total spending will likely still be the highest since FY 2004-05, maintaining the government’s policy over the past five years of focusing on capital expenditure, while also increasing welfare spending,” said Shreya Sodhani. She further stated that in terms of subsidies, there might be an increase in allocations to some core welfare schemes, but there will be no announcement of any schemes that would need higher spending over the long term while tempering the expectations of fiscal consolidation down the line.
Fiscal deficit: Will NDA 3.0 demonstrate intent?
The Union Budget, to be tabled by the finance minister on July 23, will have all eyes on it with the presence of allies which has increased scrutiny on whether the BJP-led government will change its policy focus on fiscal consolidation and switch to increased revenue expenditure, at the cost of capex.
Shreya Sodhani said, “We expect the Budget to signal continued fiscal consolidation, not only for FY24-25, but over the medium term, establishing policy continuity as the BJP has tried to do with the cabinet formation. While some increase in revenue spending seems likely, we do not expect capital expenditure to be reduced in compensation. Higher revenues, with resilient domestic activity and normalisation in the growth rate of capital expenditure – already baked into the interim Budget – will allow the government to maintain fiscal prudence.”
While one-off revenue like the RBI dividend provide some comfort on the fiscal deficit target for FY25, will the government be able to achieve the medium-term targets? “The government’s earlier stated target for the fiscal deficit in FY25-26 is 4.5 per cent of GDP. This means 60bp of consolidation for FY26, which we think should be achievable. We expect nominal GDP to grow 11.9 per cent in FY26, which means the deficit would need to be reduced by less than ~Rs 362 billion (~2 per cent of current deficit),” stated the report by Barclays.
Robust revenue receipts
Revenue receipts, particularly tax receipts, turned out to be more robust than the government’s revised estimates in FY23-24. According to the provisional accounts data, gross tax revenue at Rs 34.6 trillion (up 13.4 per cent YoY), was slightly higher than the revised estimates presented for FY24 in February (Rs 34.4 trillion). The strong growth in tax receipts was driven largely by fast growth in personal income tax and GST collections. Non-tax receipts were also robust, driven by both higher interest receipts and dividends from the RBI and other public sector financial institutions. For FY24-25, per Barclays revenue receipts (Rs 31.7 trillion, net) are expected to be to be higher than the government’s estimates made in the interim budget (Rs 30.0 trillion, FY23-24: Rs 27.3 trillion).
Increase in expenditure expected
With additional revenue headroom, the government is likely to increase expenditure, said Barclays. “While revenues registered a strong increase in FY23-24, expenditure growth moderated to the softest in nearly two decades, which in our view suggests an increase in spending is likely. Finally, we think the election results should spur the government to expand spending given the scope to do so, while maintaining its targeted consolidation. We expect the budget to announce total expenditure growth of 11.1 per cent YoY in FY25. In level terms, we expect spending to increase to Rs 49.35 trillion, compared with Rs 47.66 trillion budgeted in February.
Where can the govt increase allocations?
While the major subsidies – for food, fertilizer and petroleum – are expected to remain unchanged, according to Barclays, the increase in revenue expenditure will likely be allocated to the government’s core programs, largely those that focus on rural areas. “The government’s flagship programs, including cash handouts to farmers (PM-KISAN), rural employment (MGNREGS), affordable housing (PM Awas Yojana) and rural road upgrading (PMGSY)3 have mostly had their allocations reduced since FY21-22; therefore, we believe some increase in expenditure for these schemes is likely. These programs also could support rural demand, which has been subdued for nearly a year,” Barclays maintained. That said, the government is unlikely to announce any big bang reforms/schemes that would need higher spending over the longer term and hinder fiscal consolidation.
Source:financialexpress.com