Interim budget 2024: It makes an impressive effort on a key front

The interim budget was bound by the spirit, if not the letter, of the model Code of Conduct of the Election Commission, which forbids any policy measure that could influence the election outcome, among them “financial grants in any form or promises thereof." The letter of the law applies only after the election is notified, which cannot be earlier than three weeks prior to the first date (if multi-phase) of the election.

Thus, the code was not formally violated when the 2019 interim budget for FY20 introduced a new PM Kisan Scheme, giving farm households owning less than 2 hectares of land an annual payout of ₹6,000 in three equal instalments, retrospectively from 1 December 2018. Contrary to expectations, the payout was not enhanced this time. The budget speech referred to 118 million beneficiaries, although the expenditure figures suggest 100 million. Whatever, that is still a wide base, over which the scheme remains wildly popular owing largely to the promptness of payments every four months.

Interim budgets offer an opportunity for the government to go long on Part A of the budget speech, where developmental and fiscal achievements are laid out. The areas of emphasis for the forthcoming year are a statement of intent if elected back to office. They include a further enhancement of capital expenditure on infrastructure, including dedicated rail freight corridors and development of tourism centres, and a focus on green energy including mandated blending of biogas and incentives for rooftop solar installations.

Part B of the speech, on new tax proposals, is more significant than the expenditure proposals of Part A, because once passed in the Finance Bill, the changes come legally into effect, whether or not the government in power gets voted back in. Part B is therefore typically short in interim budgets, with a nod to the Code of Conduct. That did not deter the 2019 interim budget from raising the exemption threshold for income tax from ₹3 lakh to ₹5 lakh, and the standard deduction from ₹40,000 to ₹50,000. This time, there were no new tax proposals, but there were some write-offs of disputed dues in respect of past income tax demands, some going back to antiquity, which are estimated to benefit 10 million taxpayers. This is an overdue clean-up.

For the current year, the fiscal deficit at 5.8% of GDP is below last year’s budget estimate (BE) of 5.9 %. This is despite nominal GDP by the first advance estimate, at ₹296.6 trillion, itself falling below last year’s budget estimate of ₹301.8 trillion by an astonishing ₹5.2 trillion. The revised fiscal deficit stands at ₹17.34 trillion, lower by ₹52,000 crore than the budget estimate of ₹17.86 trillion. A major contributor was the Reserve Bank of India dividend (based on surplus earned in the previous fiscal year), which at ₹87,416 crore was roughly ₹40,000 crore more than the budget estimate of dividends aggregated across public sector banks and RBI. There was a remarkable rise in gross direct tax collections in the current year ( ₹1.22 trillion over the budget estimate of ₹18.23 trillion), but that does not actually show in net revenue to the Centre for reasons not immediately clear.

The fiscal deficit projected for next year, at 5.1% of nominal GDP, is consistent with the government’s terminal cap of 4.5% of GDP in FY26. But nominal GDP in FY25, the crucial denominator, is estimated at ₹327.7 trillion, assuming a growth rate of 10.5% over the (first advance estimate of) nominal GDP in the current year. That nominal growth rate is broadly consistent with the RBI projections at Davos on 17 January of real GDP growth in FY25 of 7%, and range-bound inflation by the Consumer Price Index (CPI). But the GDP deflator may be well below CPI inflation. Take the current year, where nominal GDP grew at 8.9%, a mere 1.6% higher than real growth of 7.3%, when CPI inflation as estimated by the RBI is at 5.4%. In the face of this uncertainty about the nominal GDP, it is the absolute fiscal deficit that has to be watched rather than the percentage.

Next year’s absolute fiscal deficit is a further ₹49,000 crore below this year’s revised estimate, but it is really best to wait for that to be validated by the final budget in July. At that time, there will be more information available on state budgets as well, and a final picture will emerge of where consolidated public debt stands.

The 2019 interim budget speech did something never done before (I would be happy to be corrected on that). It thanked taxpayers for their valuable contribution which made possible government schemes for the poor. This time too, there is a word of appreciation to taxpayers for their support, very welcome in a year in which (gross) direct tax revenues did so well.