Union Budget 2024-25: Accelerating fiscal consolidation for sustained growth

Government’s focus to accelerate fiscal consolidation may facilitate interest rate reduction, encourage private investment and augment employment.

The Union Budget 2024-25 builds on the successful fiscal and economic reforms implemented over the past 10 years. These reforms included a revision of Government of India’s (GoI) Fiscal Responsibility and Budget Management Act (FRBMA), extensive corporate income tax (CIT) reforms, implementation of GST, a steady reduction in subsidies relative to GDP and implementation of schemes such as Direct Benefit Transfers (DBT). 

Review of key fiscal trends: 2014-15 to 2023-24

The combined tax-GDP ratio of GoI and the states had languished in the range of 16% to 18% over a period of more than three decades from the late 1980s up to the recent years. It fell to a trough of 16.1% during 2019-20 and 2020-21, affected by the adverse impact of two major tax reforms – Goods and Services Tax (GST) and CIT, and the COVID-19 pandemic. After that, the combined tax-GDP ratio recovered to 18.5% in FY24. GoI’s gross tax revenue (GTR) to GDP ratio has increased from a trough of 10.2% in 2020-21 to 11.7% in 2023-24, driven largely by a relatively high direct tax buoyancy.

The contribution of non-tax revenues (NTR) to overall revenue receipts for the combined account as well as for the GoI’s revenue receipts has been rather limited. While the combined NTR to GDP ratio has ranged between 1.9% to 2.8% during 2014-15 to 2023-24, GoI’s NTR relative to GDP has ranged from 1.05% to 1.82%. RBI’s dividends, an important component of GoI’s NTR, have shown periodic jumps during 2019-20, 2021-22, 2023-24 and 2024-25. The National Monetization Pipeline (NMP), introduced in the 2021-22 Union Budget, was an important NTR augmenting initiative. This included assets with monetization potential of INR6 lakh crore from 2021-22 to 2024-25. The government has realized nearly INR3.9 lakh crore against a target of INR4.3 lakh crore in the first three years.

On the expenditure side, the combined government expenditure relative to GDP has increased from 25.5% in 2014-15 to 27.5% in 2023-24. Ignoring the COVID year, GoI’s total expenditure to GDP ratio has increased from 10.5% in 2014-15 to 12.9% in 2023-24. There has been a tangible increase in the share of capital expenditure in GoI’s total expenditure, from 11.8% in 2014-15 to 21.4% in 2023-24. Correspondingly, share of revenue expenditure has fallen. Within revenue expenditure, there has been an emphasis on reducing the share of subsidies in GoI’s revenue expenditure by better targeting and delivery to the intended beneficiaries through DBT.

With respect to GoI’s fiscal imbalance, there was a major slippage in 2020-21 after which there has been a steady stepwise improvement. GoI’s fiscal deficit to GDP ratio fell from a peak of 9.2% in 2020-21 to 5.6% in 2023-24. The quality of fiscal deficit has also improved as reflected by a fall in the ratio of revenue deficit to fiscal deficit from 76% in 2017-18 to 46.3% in 2023-24. GoI’s debt-GDP ratio has also fallen from its peak level in 2020-21.

Currently, GoI’s finances appear to be on a strong footing with its tax and non-tax revenues showing buoyant performance, structure of expenditures shifting more towards capital spending and fiscal imbalance improving significantly.  

Union Budget 2024-25: laying the foundation for sustained medium-term growth

The 2023-24 Economic Survey estimates India’s real growth to range between 6.5% and 7% in 2024-25. With respect to the nominal growth, the Union Budget has assumed it at 10.5%. However, nominal growth may turn out to be slightly higher as WPI inflation which has a higher weight in the construction of the implicit price deflator (IPD), is expected to return to its normal levels after being inordinately low at (-)0.7% in 2023-24.

The Union Budget has assumed a buoyancy of GTR at 1.03. This results in a growth of 10.8% in GoI’s GTR and a magnitude of INR38.4 lakh crore (Table 1), marginally higher than INR38.3 lakh crore as per the interim budget, owing to higher tax devolution to the states as compared to the interim budget. The net tax revenue is now budgeted at INR25.8 lakh crore. By adding non-tax revenue of INR5.46 lakh crore (mainly owing to RBI’s enhanced dividends), the resultant GoI’s revenue receipts amount to INR31.29 lakh crore. To this, if we add non-debt capital receipts (comprising disinvestment) of INR78,000 crore, we get non-debt receipts amounting to INR32.07 lakh crore.

Thus, as compared to the interim budget, total additional resources at hand amount to INR1.27 lakh crore. This was utilized to reduce fiscal deficit by a margin of INR72,182 crore as compared to the interim budget level, while revenue expenditure has been increased by INR54,744 crore. Most of this increase is directed towards spending in agriculture, labour and employment, housing, urban development, and renewable energy. Capital expenditure was maintained at INR11.11 lakh crore, the same level as in the interim budget.