The budget should outline the debt-to-GDP ratio adjustment route. This is a chance to establish strong groundwork for a growth range of 7–7.5% over the medium term.
Any pressure on the increase of revenue expenditures would need to be counterbalanced by changes in the growth of capital expenditures.
Later this month, the final 2024–25 budget is expected to be announced. The Government of India's (GoI) budgetary position seems to have somewhat improved as compared to the interim budget.
The rise in gross tax revenue (GTR) for the Government of India in 2023–2024 was 13.5%, indicating an annual buoyancy of 1.4. On the other hand, the RE for 2023–24 states that the interim budget had anticipated a rise of 12.5%. With respect to predicting tax revenues for 2024–2025—which in turn will rely on the expected performance of macro factors, namely the nominal GDP growth—this greater growth will provide an enhanced base magnitude for GoI’s GTR.
Growth and income forecasts for 2024–2025
The RBI estimates that real GDP growth will be 7.2% in 2024–2025. It is necessary to define certain concepts about implicit price deflator (IPD)-based inflation in order to calculate the nominal GDP growth. This was unnecessarily low in 2023–24, at 1.3%, because of the WPI's (-)0.7% unusually low level of inflation.
WPI and CPI inflation are weighted averages that make up the IPD-based inflation, with the former having a larger relative weight than the latter.
Calculate the nominal GDP growth rate.
The RBI's Professional Forecasters Survey (June 2024) projects WPI inflation to be close to 3% during 2024–2025. The Reserve projects 4.5% CPI inflation in 2024–2025. These figures lead us to estimate an IPD-based inflation rate of 3.6% in 2024–2025. This would provide a nominal GDP increase of around 11% when paired with a real GDP growth of 7.2%.
overall earnings
We see a GTR growth of 12.1% as possible, assuming at least a buoyancy of 1.1. We could get a GTR of Rs 38.84 lakh crore in 2024–25 if this is applied to the GTR of Rs 34.65 lakh crore in 2023–24.
After subtracting the state's portion from the GoI's GTR, we are left with INR26.44 lakh crore in net tax income for the GoI. In order to evaluate GoI's revenue collections, we must add non-tax revenues to this. Fortunately, the RBI's large payouts have also contributed to relatively strong non-tax income. We predict that GoI's non-tax income in 2024–2025 may be quite near to Rs 5.09 lakh crore given the stated dividend of Rs 2.11 lakh crore by the RBI. Therefore, it seems possible to reach total income collections of Rs 31.53 lakh crore in 2024–25. Its distribution between capital and revenue expenditures is the main policy challenge.
Prospects for spending
The GoI could need to boost its budget for revenue expenditures in order to handle a larger rise in revenue expenditures since there are certain committed expenditures on the revenue account. Increased funding for MGNREGA, subsidies for food and fertilizer, and health care costs are likely. In contrast to the interim budget, which only predicted a 4.6% increase in revenue spending above Controller General of Accounts (CGA) actuals for 2023–2024, this would need a larger rise in income.
Any pressure to increase revenue spending growth would need to be counterbalanced by moderating the aim for reducing the fiscal deficit or making modifications to the growth of capital expenditures. According to our analysis, the GoI may not budge from its declared goal of a budget deficit of 5.1% of GDP.
In the event that this is maintained, the increased revenue collections situation would still allow for an 8% rise in revenue expenditures, or somewhat less than Rs 3 lakh crore more in total.
This calculation would still allow for a 19.2% increase in capital spending, which is necessary given the ongoing global economic downturn to achieve real GDP growth for India of at least 7%. According to the most recent national income accounts, the growth rates for government and private final consumption expenditures in 2023–2024 were 2.5% and 4%, respectively. It is necessary to encourage their spending on consumption. The state governments will need to encourage consumer expenditures in their individual states, even if the rise in GoI's revenue expenditures would help with this.
Path of medium-term fiscal consolidation
GoI must indicate its intention to lower its budget deficit to GDP ratio to the FRBM standard of 3% by the middle of the next year. It may take three or four years at this point. The 2024–25 budget should, however, include a detailed adjustment path that projects the level of debt to GDP ratio as the fiscal deficit to GDP ratio gradually decreases to 3%. In the meanwhile, actions must be done to encourage the expansion of private investment, which will be aided by a policy rate decrease in the next rounds of the RBI's monetary policy reviews.
For the next three years, the World Bank has predicted that global growth would range between 2.6% and 2.7%. With low growth and unsustainable debt levels challenging the global economy, the final budget for 2024–25 gives the GoI a timely opportunity to lay the groundwork for India's medium-term growth in the range of 7% to 7.5%, well above the average growth rate of the world. It also signals the GoI's commitment to reducing the fiscal deficit and debt relative to GDP to FRBM consistent levels.
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