25 Jun 2024
Budget FY 25

What to expect from India’s Union Budget 2024-25

D. K. Srivastava
By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

25 Jun 2024
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GoI may continue to prioritize capex growth, while pursuing fiscal consolidation. 

In brief

  •  The Indian economy is presently well-poised with a buoyant GDP growth of 8.2% in 2023-24, which follows growth rates of 9.7% in 2021-22 and 7% in 2022-23.  
  • Government finances are quite robust as reflected by a consistent fall in GoI’s fiscal deficit from 9.17% of GDP in 2020-21 to 5.6% in 2023-24.
  • The 2024-25 budget is expected to emphasize sustaining India’s medium-term growth by focusing on infrastructure expansion while ensuring fiscal consolidation. 

The upcoming budget for 2024-25 is likely to be used by the GoI to signal any changes in policies and preferences as well as for clearly laying down the foundation for robust medium-term growth and fiscal consolidation. 

Underlying macro parameters

Recently released NSO data highlight a robust real GDP and GVA growth performance of 8.2% and 7.2% respectively in 2023-24. Two noticeable features of this growth profile are (1) a large difference between real GDP and real GVA growth, and (2) a small difference of only 1.4% points between GDP growth at current and constant prices. The reason for the first feature is the increase in growth of net indirect taxes (indirect taxes minus subsidies) owing to a sharp fall in subsidies. The reason for the second feature is the relatively low implicit price deflator (IPD)-based inflation, estimated at 1.3% in 2023-24. For 2024-25, we expect that both these features would be revised to their normal magnitudes. The RBI, in its June 2024 monetary policy review, has estimated a real GDP growth of 7.2% and a CPI inflation of 4.5% in FY25. Taking into account this projection of CPI inflation and a WPI inflation of about 3% (RBI’s Professional Forecasters Survey - June 2024), the IPD-based inflation may be estimated at 3.6% considering an implicit weight of 60% for WPI inflation and 40% for CPI inflation. Thus, the nominal GDP growth in 2024-25 that should be considered in the upcoming budget is estimated at close to 11%.

Review of recent fiscal trends

Tax revenues

Table 1 provides an overview of fiscal aggregates relative to nominal GDP over the period 2014-15 to 2023-24. GoI’s GTR to GDP ratio increased from 10% in 2014-15 to 11.2% in 2017-18. However, the impact of two major tax reforms relating to GST and CIT in 2017-18 and 2019-20 respectively led to a fall in the GTR to GDP ratio to 10% in 2019-20. The COVID affected year of 2020-21 did not show any significant improvement in this ratio. Post 2020-21, GoI’s GTR to GDP ratio has increased to reach a peak of 11.7% in 2023-24, comparing well to the previous peak of 12.1% in 2007-08. 

In gross terms, the contribution of direct taxes to GoI’s GTR has been substantially higher than that of indirect taxes, particularly in recent years. Chart 1 shows that the shares of both direct and indirect taxes in GoI’s GTR during 2017-18 to 2020-21 were affected by major reforms and the COVID pandemic. The first revenue impact of both tax reforms, namely transition to GST in 2017-18 and CIT reforms in 2019-20, was adverse. In the post-COVID years, these shares appear to be stabilizing, with direct taxes showing a much higher buoyancy relative to GDP compared to that of indirect taxes. 

Non-tax revenues and disinvestment

Non-tax revenues relative to GDP have languished in the range of 1.0% to 1.8% throughout the period from 2014-15 to 2023-24. In 2023-24, it is estimated at 1.4% of GDP (CGA). However, after accounting for RBI’s enhanced dividends, there would be an additional transfer to the GoI of INR1.1 lakh crore in 2024-25, amounting to 0.33% of estimated GDP. Thus, in the upcoming budget, non-tax revenues may be expected to reach a level of 1.55% of GDP in 2024-25.

Disinvestment receipts to GDP ratio have remained quite low during the period 2014-15 to 2023-24. Actual disinvestment receipts relative to the target were in excess of 100% in only four years of the ten-year period under review. This performance, however, has deteriorated in recent years from 2021-22 to 2023-24.

Expenditure claims 

On the expenditure side, revenue expenditure has been stable in the range of 11.0% to 13.6% of GDP during 2014-15 to 2023-24, excluding 2020-21 when it increased to 15.5%. Among major components of revenue expenditure, subsidies fell from 2.07% in 2014-15 to a low of 1.18% in 2019-20.  It rose in the COVID year of 2020-21 to 3.82% of GDP before falling again to 1.49% in 2023-24 as per the revised estimates in the interim budget 2024. Interest payments, which had stayed within a narrow range of 3% to 3.2% of GDP during 2014-15 to 2019-20 have increased to 3.6% in 2023-24 owing to an increase in GoI’s debt to GDP ratio. Capital expenditure which had remained less than 2% of GDP between 2014-15 and 2019-20 has shown a sustained increase from 2.1% in 2020-21 to 3.2% in 2023-24.

Fiscal deficit and debt

GoI’s fiscal deficit had fallen from 4.10% of GDP in 2014-15 to 3.44% in 2018-19. This movement towards the FRBM norm of 3% was reversed in 2020-21 due to the contraction in real GDP of (-)5.8%. Fiscal deficit shot up to 9.17% of GDP, although since then, there has been a gradual fall. By 2023-24, it has reached 5.6% as per the CGA actuals, an improvement over 5.8% as estimated in the interim budget 2024. These higher than norm fiscal deficit levels have resulted in an increase in outstanding debt of the GoI, which had peaked to 60.7% of GDP in 2020-21. Although it has fallen to an estimated 57.1% in 2023-24, it remains higher than the FRBM norm of 40%. The quality of fiscal deficit reflected by the ratio of revenue deficit to fiscal deficit has however improved from near 80% in 2020-21 to 46.3% in 2023-24.

Union Budget 2024-25: the fiscal arithmetic

For the 2024-25 final central budget, the main trade-off appears to be between emphasizing capital expenditure growth vis-à-vis a reduction in fiscal deficit to GDP ratio. In order to understand the fiscal arithmetic, we look at the difference between fiscal aggregates relative to GDP between the base year of 2023-24 and 2024-25 (2024-25 (FBE) minus 2023-24). This difference is at 0.38% points of GDP for GoI’s revenue receipts (tax plus non-tax revenues). Further, there is an expected increase in non-debt capital receipts of 0.04% points, giving an additionality of 0.42% points for non-debt receipts (revenue receipts plus non-debt capital receipts). On the expenditure side, following recent trends, we expect a further fall in revenue expenditure relative to GDP by a margin of 0.37% points (Table 2).  This would enable an increase in revenue expenditure growth of 7.5% in 2024-25 FBE over 2023-24 CGA actuals. This is slightly higher than 4.6% growth provided in the interim budget 2024, reflecting additional allocations to cover some of the post-election supplementary expenditures. Thus, a total additionality of 0.79% points of GDP would be available (0.42% points on account of an increase in non-debt receipts plus 0.37% points on account of reduction in revenue expenditure). Of this, 0.6% points of GDP may be used to bring down GoI’s fiscal deficit to GDP ratio to 5% and the remaining 0.19% points can be used to increase capital expenditure to GDP ratio to 3.4%, implying a capital expenditure growth of 17.5% in 2024-25 over 2023-24 CGA actuals. This may be increased even further if the fiscal deficit to GDP ratio is kept at 5.1% as per the interim budget 2024.

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Summary

Government of India has a clear thrust towards fiscal reforms, particularly reducing both major subsidies as a proportion of GDP and revenue expenditure growth and lowering fiscal deficit to GDP ratio. These measures have laid a solid foundation for India to achieve a sustainable medium-term growth of over 7%, a significant achievement despite the expected drag on global growth.

About this article

D. K. Srivastava
By D. K. Srivastava

EY India Chief Policy Advisor

A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th Finance Commission.

Related topics Tax
Upvote