HIGH ON CONFIDENCE, NOT ON POPULISM

FM overperforms on deficit, stays away from sops, pushes feel-good factor by ending old tax disputes, lists out decade of development

When Union Finance Minister Nirmala Sitharaman rose to present the Interim Budget on Thursday, it was an open question as to whether it would focus on consolidating the gains made in recent years on fiscal consolidation, or move towards full-throated populism in anticipation of general elections in the next few months. The answer from the FM was clear: Nothing would change. Expenditure will be compressed in 2023-24, and no major giveaways for 2024-25 were announced. Expectations that the finance ministry would make use of higher-than-expected revenue receipts to pad expenditure did not materialise, and borrowing is projected to shrink in the coming year.

The FM repeated her commitment to the fiscal consolidation glide path that had previously been announced, which is supposed to take the fiscal deficit down to “below 4.5 per cent” of gross domestic product or GDP by 202526. The fiscal deficit for 2024-25 is projected to be 5.1 per cent of GDP; that will do more than half the work of getting to 4.5 per cent from the 5.8 per cent of GDP that the deficit is expected to be in the ongoing fiscal year.

That 5.8 per cent of GDP could be managed in 2023-24 is itself no mean achievement. Not only is this lower than the target in last year’s Budget of 5.9 per cent of GDP, but also — as the minister was at pains to point out — the nominal GDP target came in below estimates, making her task more difficult. Nominal GDP is projected to grow, in the coming fiscal year, at 10.5 per cent year-on-year.

Deficit compression was aided by non-tax revenue coming in at ~74,000 crore higher than budgeted. This increase of 25 per cent was mainly due to hefty dividends from the Reserve Bank of India and public sector banks. On the other hand, contrary to some expectations, net tax revenue receipts to the Union government were marginally lower than those projected in Budget 2022. Partly this was, according to the Budget documents, because the Union transferred in excess of ~7,000 crore to the state governments. Total expenditure in 2023-24 was compressed, when compared to the Budget Estimates, by almost exactly as much as net tax revenues.

This expenditure compression came largely on the capital account. Capex in 2023-24 will be just over 5 per cent lower than budgeted last February. One large contributor to this lower-than-expected capex is the absence of a ~30,000 crore payout to oil marketing companies for infrastructure renewal. This has been shifted to the next fiscal year, and halved to ~15,000 crore.

Nonetheless, infrastructure will continue to be financed at high levels, with an increase of 17 per cent over last year’s Budget planned for 2024-25. This will be spent, among others, on railway upgradation — Vande Bharat-level coaches and new dedicated corridors for freight. The railways get almost 60 per cent more than they did two years ago.

The finance minister kept revenue projections for the next year conservative, expecting a mere 12 per cent increase. Market borrowings have come down, which has been a relief for the bond market. On the other hand, no major tax changes were announced other than an extension of some tax benefit schemes. The Sensex closed 0.1 per cent down after volatile trading, led by declines in infra stocks. But the bond markets celebrated, with the benchmark 10-year yield falling by 11 basis points, the most in over a year, in response to the lower borrowing and deficit targets.

WHILE KEEPING THE FISCAL DEFICIT UNDER CONTROL, THE CAPEX HAS SEEN A HISTORIC INCREASE TO ~11.1 TRILLION IN THIS BUDGET. IN ECONOMISTS’ PARLANCE,

THIS IS A KIND OF SWEET SPOT NARENDRA MODI, Prime Minister

Guarantee for a developed India

On withdrawal of outstanding tax demand

Sanjay Malhotra (revenue secretary): Large amounts in tax demand are pending. The total amount is very high, at around ~35 trillion. Of these, 21 million demands are valued at less than ~25,000. Of those, 5.8 million entries for FY09-10 and another 5.3 million for remaining five years are being remitted. The total amount would be less than ~3,500 crore. Mostly these demands do not exist and they will not yield any revenue. It is not a waiver. The finance minister has not called it a waiver but a correction of entries.

On research, innovation fund T V Somanathan (finance secretary):

The ~1 trillion provision is for a period of time — as the need emerges — to be given as a 50-year interest-free loan to a financial institution which will be identified. This institution will finance or refinance projects at long tenors and concessional rates of interest.

Ajay Seth (Department of Economic Affairs secretary): This is for innovation and research in sunrise sectors. Clear identification of the sunrise sectors would be through a stakeholder process.

On Housing Scheme Somanathan: The contours are being worked out. Nothing has been finalised yet. Multiple options are being considered to achieve the purpose that has been set out.

On high-level committee on demographic challenges

Seth: When we talk of demography, it is an opportunity and a challenge. This committee will have a mandate of considering those challenges and opportunities and come out with a specific set of recommendations.

On the Middle East Europe Corridor

Sitharaman: We are taking it forward. Yes, there is significant disturbance in the Red Sea area, but this is a project that has longterm implications for the entire region up to Europe. We will take it forward in all its contours.

On the National Pension Scheme

Sitharaman: Once we are ready with the report, we will let you know, there was no time given.

On fertiliser subsidy

Somanathan: It is estimated based on recent trends in ammonia and fertiliser prices which have trended downwards in the last six months. It is our current estimate based on the best information we have right now.

On lowering market borrowings

Somanathan: The confidence (for lowering) comes from the numbers that are presented. The revenue and expenditure numbers are realistic, then deficit numbers are realistic. Therefore, deficit numbers are achievable. There is a declining trend in external debt and small savings. On gross borrowing next year, some of the repayment of loan would not happen from the consolidated fund; they are repayment for GST back-to-back loans. There is a slight recalibration.

On MGNREGA

Sitharaman: The Comptroller and Auditor General (CAG) has commented on the way the MGNREGS is operating in some states where claims are reaching a stage where they need to be verified. Questions critical to the very spirit of the programme are being raised.

To that extent, the CAG report highlights where course correction has to happen.