Budget priorities and challenges in an election year

- The interim budget will push for more spending allocations and tax relief

Amid preparations for the presentation of the Interim Budget for the year 2023-24, two important issues are under scrutiny. One relates to the fiscal space and size that the central government currently has to meet its expenditure over the next two years. The second issue relates to the political imperative of the government to announce any new spending plan to gain the necessary electoral leverage in the upcoming general elections. In such a situation, when Finance Minister Nirmala Sitharaman is preparing to present her first interim budget, it would be appropriate to evaluate both these issues. Growth projections are important in the government's fiscal consolidation strategy. The first advance estimates of the country's Gross Domestic Product (GDP) were released recently. It was said that the nominal size of the economy will be Rs 296.58 lakh crore in 2023-24, which means it will register a growth of 8.9 percent.

Despite relatively low growth in nominal GDP in 2023-24, the Centre's net tax revenue grew by over 17 percent in April-November 2023. That means tax receipts have improved. Not only this, it seems that the target of 11 per cent net growth in tax revenue in 2023-24 will also be exceeded. As for expenditure, both the Centre's revenue and capital expenditure have declined in recent months. In the first half of 2023-24, the revenue expenditure has increased by about 10 percent. But by the end of November, this growth came down to 3.5 percent.

It is clear that growth in revenue expenditure is being moderated in line with the target of 1.4 per cent for the year as a whole. Capital expenditure also increased by 43 per cent in the first half of 2023-24 but fell to 31 per cent in April-November. This is lower than the estimated 36 percent for the entire year.

Non-tax revenue will exceed budget estimates and offset the shortfall in the government's disinvestment receipts. A low nominal growth rate of 8.9 per cent in 2023-24 compared to the budget promise of 10.5 per cent may put some additional pressure on government finances, but given improved revenue and slower expenditure growth, the announced fiscal deficit target is achievable. It is like that.

A low nominal growth rate of 8.9 per cent in 2023-24 will be a cause for concern for budget makers and will affect the projections for 2024-25. In the past few years, extra-budgetary spending was not supported but now the relatively low nominal GDP growth projection may be a constraint. The interim budget for 2019-20 was supported by projections of GDP growth of over 12 percent in 2018-19. Due to this same figure, five years ago in the interim budget it was assumed that nominal economic growth would be 11.5 percent in 2019-20.

Today's finance ministry is very different from 2019. In such a scenario, the FAE showing a modest GDP growth of 8.9 per cent in 2023-24 would naturally prevent the current Finance Ministry from projecting a larger indicative size for the Indian economy in 2024-25. Recent reports suggest that the finance ministry may stick to a nominal growth rate of 10.5 per cent in 2024-25. Better tax collection may help the central government better project double-digit revenue growth for 2024-25 but may not help increase capital expenditure and reduce the fiscal deficit. Fiscal space is limited if the Center is to bring down its deficit to 5.9 percent of GDP this year and 4.5 percent in 2025-26. A decline of 1.4 per cent in the next two years will be challenging. Despite strong revenue growth in post-Covid years i.e. 2022-23 and 2023-24, the government had to spend more.