Budget 2024 Expectations: Needed More Of The Same
Budget must continue to allocate money towards enhancing the safe speed limit for economic growth
The Bank for International Settlements In its annual report on the global economy warned that governments should cut back on borrowing to ease one of the biggest threats to the stability of the global financial system and support efforts to tame inflation. It also cited the U.K. episode in 2022 wherein investors jettisoned government bonds leading to a spike in borrowing costs up, weakening the currency and hurting equities into a tailspin.
So, that in a nutshell is the global backdrop in which the Government will present its full Budget for 2024-25. Domestically, the backdrop is that of a near ‘goldilocks’ economy with robust GDP growth and low inflation. For the entire fiscal year 2024, GDP growth has been revised upwards to 8.2 per cent which makes it the fourth consecutive year of 7 per cent plus growth. Importantly, the RBI recently raised India’s FY25 real GDP forecast to 7.2 per cent from 7 per cent earlier in its last meeting.
However, growth has been uneven, and consumption has been a laggard. The RBI’s Financial Stability Report released last week highlighted a new risk in the form of risk from lower consumption and demand even as it noted that global monetary tightening risk had moderated. Moreover, while monsoons are on time, it has been in deficit in June and water reservoir level in the 150 main reservoirs across the country has dipped to just 20 per cent of their total live storage capacity. Yet, in its upcoming Budget, the central message has to be continuity. And there has to be continuity in more ways than one.
First, there has to be continuity in performing the cliched ‘’balancing act’’ as there is a felt need to address the pockets of pain at the lower end of the economy even as there is need for fiscal consolidation as highlighted by the BIS. The government has to weigh whether to follow a path of a faster fiscal deficit reduction given RBI’s dividend bounty or to address the fact that, the post-pandemic recovery in private consumption is still incipient and chip in with supportive measures to prop consumption and incomes.
Second, the Budget must continue to allocate money towards enhancing the safe speed limit for economic growth. Globally, the macro surprise indices have begun to turn negative for most key economies. India has seen significant and continued growth upgrades, but that phase may be coming to an end.
That means continuity by way of prioritization of segments such as capital expenditure and infrastructure development, investments in manufacturing via a focus on PLI, right duty structures and rates as well as measures to improve ease of doing business. These will help sustain the revival in private investments. Also, apart from electronics, renewable energy and defense, a clear-eyed focus on construction will help address the jobs issue.
The third thing that the budget must do is to continue on furthering transparency. The FM in her previous Budgets has brought in a remarkable degree of transparency by way of removing off-Budget expenditure items. This has enabled a much more accurate assessment of the government's fiscal position that is needed more so in the wake of India’s inclusion in leading global bond indices. Finally, continuation on the path of fiscal consolidation is an absolute must and not the least because S&P has said that India can get a sovereign rating upgrade in two years if the fiscal deficit falls to 4%. The government has taken steps towards fiscal consolidation with a budgeted fiscal deficit of 5.1 per cent of GDP in F25 going down to 4.5 per cent of GDP by FY26. State deficits too have been largely reined in. But more is needed.
Why is the fiscal prudence angle so important? India’s fiscally responsible budgets have gone a long way in ensuring macro stability and keeping bouts of volatility away from interest rates and the INR. Also, bear in mind that the global backdrop is very fragile, and India’s general government debt is still amongst the highest in the world. In fact, India ranks 120th when it comes to general government debt out of the 137 countries rated by S&P. In the BBB- rated cohort, the average net general government debt at 38% as a percentage of GDP in 2023 was less than half of India’s 86 per cent. Only Greece, within the BBB- category, has a higher general government debt than India at 143% of GDP but it must be noted that Greece’s per capita income was $22,874 in 2023.
The government's commitment to fiscal responsibility and capital formation is unlikely to waiver. It will want to signal policy continuity to not just entrepreneurs and investors sitting on the fence but also to rating agencies. Further, it will also encourage private sector participation as an epilogue to public capex spending, to deliver the country's broader growth and jobs agenda.
