With respect to non-tax revenues, during 1HFY24, GoI’s has already achieved 78.5% of the annual BE. There is, however, an expected slippage in disinvestment receipts. As a proportion of the BE, disinvestment receipts were only 14% as on 14 November 2023, although the BE at INR51,000 crore was itself substantially reduced as compared to previous years. In such a situation, any shortfall in disinvestment may be made up by a marginal excess of non-tax revenues compared to BE.
Government expenditure
The central government has prioritized capital expenditure during 1HFY24. GoI has already expended nearly 50% of the BE, higher than the corresponding ratios with respect to actuals in the preceding three years. Similarly, revenue expenditures stood at a high level of 46.5% of the BE during 1HFY24. Due to the pressure on global crude prices, major subsidies are expected to exceed the budgeted magnitudes. Available information indicates that the annual fertilizer subsidy may amount to INR2.25 lakh crore as compared to the BE of INR1.75 lakh crore1 . In order to adhere to the budgeted fiscal deficit, any unanticipated excess of revenue expenditure may call for some adjustment in either capital expenditure or some other component of revenue expenditure. The latter would be preferable to the former to the extent feasible.
Recalibrating the fiscal glide path
The budgeted fiscal deficit to GDP ratio of the GoI is 5.9% for FY24. Owing to higher fertilizer and other petroleum linked subsidies, there may be some pressure on government spending. Considering recent estimates of additional fertilizer subsidies to the extent of INR50,000 crore and using the budgeted magnitude of nominal GDP, the fiscal deficit to GDP ratio may increase to close to 6.1%. There may be further pressure on this number due to a slippage in nominal GDP growth, and any shortfall in the budgeted GTR.
In FY25, the GoI should signal a movement towards the stated fiscal deficit target of 4.5% of GDP in FY26. If evenly distributed, this would imply achieving a 5.2% fiscal deficit relative to GDP in FY25. The medium-term glide path should pass through the 4.5% target in FY26 and spell out annual reduction targets to achieve the norm of 3% of GDP latest by FY28. This should be explicitly detailed at least in the main Budget, as mandated by the FRBM Act as amended in 2018.
In order to ensure that the combined fiscal deficit relative to GDP is brought closer to 6%, GoI may consider constituting a Loan Council to oversee the annual borrowing programs of the central and state governments. It is also desirable to show a balance on revenue account and reduction of government debt-GDP ratio. This is needed to augment the aggregate savings rate by reducing government dissavings so that the medium-term growth can be sustained at close to 7%.
Sustaining high medium-term growth: role of fiscal policy
In the medium-term, GoI should maintain its focus on expanding infrastructure through increased capital expenditure. Given the volatility in global crude prices and supplies, GoI’s program to shift to alternative sources of supply of crude and the use of alternative fuels should be accelerated. To encourage investment in and adoption of advanced digital technologies, including Generative AI, the GoI may consider expanding the PLI schemes to cover development of supporting hardware. Further, in order to optimize the economic impact of Gen AI, there is a need to allocate resources, both by the government and the private sector, for training and reskilling of India’s growing workforce. As per UN, in 2025, India’s working age population (WAP) estimated at 994.7 million is expected to exceed that of China2 by 7.3 million, making India the largest working age population country globally. By 2030, with close to 1043.4 million working age persons in India, this excess of WAP as compared to China is projected to increase nearly ten-fold reaching 70.9 million. To reap the benefits of this burgeoning working age population, their productive employment and increase in productivity would prove to be crucial. This would depend on increased employment elasticity of output, and higher investment in human capital.
