Interim Budget A Non-Event, But The Numbers Tell A Story

“In keeping with the convention, I do not propose to make any changes relating to taxation and propose to retain the same tax rates for direct taxes and indirect taxes including import duties,” Sitharaman said.

In the absence of any major decisions, therefore, the key takeaways from the interim budget lay in the balancing of numbers for the current fiscal year.

The government’s ability to keep fiscal deficit under check and lower borrowing from the market bodes well for the private sector, which can hope to access more capital to borrow and face less pressure on lending rates.

The fiscal deficit, which is the broadest measure of what the government earns and what it spends in a year, is estimated at 5.8 per cent of the gross domestic product (GDP), a tad lower than the budgeted 5.9 per cent. Better, there is also a decline in absolute terms – from Rs 1.79 lakh crore to Rs 1.73 lakh crore.

The government is aiming to bring it down further to Rs 1.68 lakh crore, or 5.1 per cent of GDP, in FY 2024-25. Accordingly, the government’s market borrowing is expected to decline from Rs 11.80 lakh crore this year to Rs 11.75 lakh crore next year.

The bond market cheered the news with the yield on the benchmark 10-year government securities falling as much as 9 basis points in afternoon trade Thursday. Shares of PSU banks, which stand to benefit from it, rose sharply soon after the budget was presented.

That said, a closer scrutiny of the balancing of fiscal numbers raises some concerns. The finance minister has been able to hold the fiscal deficit under check by keeping both total receipts and total expenditure on budgeted lines. At a disaggregated level, however, one gets a mixed bag.

Record Income Tax Collections

While corporation tax and GST collections have been on track, there is a sharp fall in custom duty collections as also collections from excise duties that are not covered under the GST, such as duties petroleum goods, alcohol and tobacco products.

These shortfalls, however, have been more than made up by a sharp uptick in personal income tax collections, which are now estimated at Rs 10.22 lakh crore compared to the budget estimate of Rs 9 lakh crore. The buoyancy in income tax collections is encouraging, so are the outcomes with regard to Goods and Services Tax, collections of which have been averaging around Rs 1.7 lakh crore in recent months.

As a result, the government is expected to net as much Rs 76, 353 crore more in gross tax revenues than what it had budgeted for the current fiscal year.

Nonetheless, the sharp decline in customs revenues -- from Rs 2.33 lakh crore in budget estimates to Rs 2.19 lakh crore in revised estimates -- is a sign of a lower import appetite of the Indian industry, especially the export-focussed businesses. Worse, the projection of Rs 2.31 lakh crore in customs revenues in 2024-25 points to a pessimistic exports outlook on the part of the government.

Disinvestment Shortfall Offset By Dividend Payout

The government’s disinvestment programme has been a disaster. Against the budget estimate of Rs 51,000 crore, the government hopes to raise Rs 30,000 crore from share-sale in public sector undertakings in 2023-24. Even that number may not be met. The slow progress on privatisation is a dampener for enthusiasts of economic liberalisation.

The finance minister, however, has succeeded in tiding over the shortfall in disinvestment by raising a lot more from PSUs and the Reserve Bank of India in dividend payouts. Against the budget estimate of Rs 91,000 crore, she now hopes to raise a record Rs 1,54,407 crore in dividend income this fiscal.

Such high rates of dividend payouts may help the government keep its fiscal balance, but these could be detrimental to the long-term interests of profitable PSUs who could go short on finding resources to fund future growth.

High On Capital Spending

The finance minister has made a provisional allocation of Rs 11.1 lakh crore for capital expenditure in FY 2024-25, up 11% from the budgeted allocation for the current fiscal. Compared to the revised estimates, the allocation for the next fiscal is almost 17 per cent higher, which is heartening.

More so, this doesn’t include the grants-in-aid for states on account of the Mahatma Gandhi National Rural Employment Guarantee (MNREGA) programme. The government has already set aside Rs 26,000 crore to spend over and above the Rs 60,000 crore it had budgeted for the current fiscal year. For 2024-25 as well, Rs 86,000 crore has been allocated for MNREGA.

While the thrust on higher capital spending helps revive the growth momentum of the broader economy in the longer term and higher MNREGA allocations create livelihood opportunities for the jobless and poor, these would appear to have come at the expense of critical social sector spending.

Spending on education, health, social welfare, and urban development is estimated to fall widely short of what was budgeted for 2023-24. Worse, the trend is not unique to the current fiscal year. In fact, for several years now, the government has been persistently failing to spend on these heads what it allocates at the beginning of the year.

If one adjusts for inflation, the growth in budgetary spending on education, health, rural development, and social welfare has been negligible, with exceptions such as in the year of Covid 19 pandemic.

Although state governments have a bigger responsibility when it comes to social sector spending, the Centre’s role remains critical, especially at a time when investment in these sectors shapes the future of aspirational India.

The cuts in social sector spending have helped the finance minister keep overall expenditure on budgeted lines despite a sharp spike in defense, mostly on account of modernisation, and foreign ministry spending on account of the G20 summit. There has also been a squeeze on transfers to states.

In fact, the revised estimates peg total government spending in the current fiscal a tad lower than the budgeted number, Rs 44.9 lakh crore (RE) against Rs 45.03 lakh crore (BE). With little change in expenditure number, higher-than-expected revenues are thus expected to leave the government with a lower fiscal deficit.

Mind The Elections

Besides MNREGA, the Interim Budget also provides for a significant hike in allocations for subsidy on food, petroleum, and fertiliser, in measures aimed at keeping voters happy ahead of the parliamentary elections due in April-May. The finance minister also announced a new scheme for urban housing.

Revised estimates for 2023-24 show that the government will likely spend about Rs 1.89 lakh crore compared to Rs 1.75 lakh crore, primarily because it wants to absorb the impact of rising costs of imports amid the worsening Red Sea crisis.

India imports a lot of fertiliser from countries like Morocco, Jordan, Egypt, Israel, and Saudi Arabia. Shipments from these countries have become expensive following the conflict in the Gulf. Not raising subsidies on fertiliser would have meant producers would pass on the higher cost to farmers and that could earn the government the latter’s disaffection.

Subsidy on petroleum products has risen almost six-fold compared to budget estimates as the government cut the price of cooking gas in the face of growing criticism from opposition parties.

Similarly, the food subsidy bill too has gone up after the government in November announced a five-year extension to its free ration scheme, under which five kgs of ration is provided to every member of families covered by the public distribution system.

No Bad News Is Good News

As for the industry and businesses, which had been reeling out wish-lists in the run-up to the interim budget, they will have to wait until a new government takes office and presents a full budget.

Nonetheless, the allocation for the PLI (Production Linked Incentive) scheme has been increased and certain tax benefits to startups and investments made by sovereign wealth or pension funds as well as tax exemption on certain income of IFSC units have been extended by one more year.

Sitharaman’s assurance to continue the simplification of taxation rules and procedures, the government’s continued thrust on infrastructure development, and the improved prospects of softening interest rates are positives for the private sector. That is why, perhaps, the stock market was largely indifferent to the Interim Budget. It would rather continue to be driven by quarterly earnings being reported by the companies.

In short, no bad news should be good news for industry and businesses.

(Sunil Pew and Prakriti Bakshi contributed to the charts)