7 minute read 24 Nov 2023
India's FY25 interim budget

How India’s FY25 interim budget could prepare ground for the main budget

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.

7 minute read 24 Nov 2023
Related topics Tax COVID-19

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Amid global risks, India may have to rely on domestic factors to drive medium-term growth.

In brief

  • Central government’s interim budget for FY25 is due to be presented on 1 February 2024 while the main budget preparation will take place after the general elections.
  • While the interim budget is not expected to contain any new major policy proposals, it would provide for the estimated cost of any pre-budget policy announcements by the government.
  • The interim budget would provide an assessment of the overall economy and its fiscal health.

India appears to be a bright spot amid the overall dim global economic outlook. India’s economic growth projections for FY24 range from 6.3% (International Monetary Fund and World Bank) to 6.5% (RBI). As against this, the IMF's projections for global growth indicate a decline from 3.5% in 2022 to 3% in 2023 and further to 2.9% in 2024. These figures are notably below the historical average growth rate of 3.8% observed from 2000 to 2019.

Assessing India’s FY24 and FY25 economic growth projections

Following an estimated growth between 6.3% and 6.5% in FY24, India is forecasted to show a growth of 6.3% (IMF) to 6.4% (World Bank) in FY25. The RBI’s Professional Forecasters’ Survey (October 2023) also pegs it at 6.3%. India's FY24 growth prospects may face challenges from prospects of deficient south-west monsoon (SWM); global crude price unpredictability and related pressures; subdued growth/continued contraction in merchandise exports; possibility of significantly low net Foreign Direct Investment (FDI) inflows; and relatively lower nominal Gross Domestic Product (GDP) growth due to low implicit price deflator (IPD)-based inflation and related fiscal risks.

Interim budget analysis: some critical magnitudes

The Government of India (GoI) is set to present the interim budget for FY25 on 1 February 2024. Using fiscal data up to December 2023 from the Controller General of Accounts (CGA) and combining it with full-year budget estimates, revised estimates for FY24 will be assessed. These revised estimates will serve as the base for formulating the budget estimates for FY25.

Government revenues

GoI’s gross tax revenue (GTR) growth was budgeted at 10.4% comparing FY24 Budget Estimate (BE) with FY23 Revised Estimate (RE). The assumed tax buoyancy was close to one, with an underlying nominal GDP growth of 10.5% (Table 1). Based on CGA data available for the first six months of FY24, it is difficult to take a call on the full year prospects of GoI’s GTR due to large inter-month volatility, at least in the initial months of FY24. At present, the GTR growth for 1HFY24 at 16.3% is well above the budgeted annual growth. If we juxtapose the annual buoyancy estimate of GTR at one with the expected nominal GDP growth of 9%, the expected annual growth in GoI’s GTR would be 9%.

This would imply that the annual magnitude of the GTR at INR33.6 lakh crore would be achieved either by an increase in the tax buoyancy to about 1.12 or by an increase in the nominal growth rate to close to 10%. The probability of either of these two happening on their own or in a suitable combination is high.

We anticipate no significant shortfall from the estimated GTR magnitude as outlined in the FY24 Union Budget. However, there is a potential risk on the revenue side due to a possible reduction in union excise duty (UED) rates on petroleum products if global crude prices stay high. An estimated shortfall of INR 45,000 crore in UED revenues is expected, but this might be partially offset by a robust direct tax buoyancy. Already, direct taxes have grown by 25.4% during 1HFY24. 

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.

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Risks to India’s FY24 growth may emanate from deficient south-west monsoon, volatile global crude prices and supplies, subdued growth in merchandise exports, significantly low net FDI inflows, and lower than budgeted nominal GDP growth linked to near-zero WPI inflation. The interim budget for FY25 should provide a credible glide path to bring down the high levels of government debt and fiscal deficit. Fiscal policy should be oriented to continue the thrust on capital expenditure. These budgetary measures would help India achieve and stabilize a medium-term growth of close to 7%.

About this article

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 COVID-19