Interim Budget 2024-25 : Some Observations | Atul Sarma & Shyam Sunder

As is well known, Interim Budget / Vote on account is meant to seek authorization of Parliament to carry on spending on important schemes until the new government assumes office. But this is a pre-election document. It is not expected to make any major policy announcements though this is not strictly adhered to, The FM has seized the opportunity to showcase the achievements of the government since the BJP government came to power almost ten years ago.

Interim Budget was cast in the background of strong GDP growth at 7.3 %, higher than most of the large economies despite global uncertainty. However, GDP level at ₹171.8 lakh crore in 2023-24 is still lower (by about 16%) than the pre pre-pandemic level of ₹203.9 lakh crore in 2019-20. and inflation is also high. Importantly, private final consumption which is a major important driver of growth has not kept with the pace of GDP growth. In fact, the private final consumption as percentage of GDP fell to 56.9 in 2023 from 58.3 in 2021.

Keeping an eye on the rating agencies, the budget has laid major focus on fiscal stability. The reason why the thrust is on fiscal stability is needed that even a small increase in fiscal deficit adds to the already elevated outstanding liability/ public debt. Indeed, the fiscal deficit is brought down from 6.4% of GDP in 2022-23 to 5.9 of GDP in 2023-24 (BE), to 5.8% of GDP in 2023-24 (RE). It is further proposed to reduce to 5.1% of GDP in 2024-25 (B.E). 95% of this fall in FD is by compressing capital expenditure.

Despite reduction of FD the Centre’s outstanding debt remained at the same level of 56.9% of GDP both in 2023-24 and 2024-25. As per FRBM law, the general government debt was to be brought down to 60% of GDP-the Centre’s 40% and states’ 20 % by 2024-25. The outstanding public debt stands at 81% in2022-23 and is expected to increase to 83% of GDP in 2024-25.

Notably, the revenue deficit has been significantly reduced from 3.9% of GDP in 2022-23 to 2,8 % in the revised budget for 2023-24 and to 2.0 in the budget estimate for 2024-25. Accordingly, RD has come to account for 38% in 2024-25 from as much as 61.5% of the fiscal deficit in 2024-25 (BE).

Fiscal stability requires states also to contain their fiscal deficit. But while the Centre reduced FD from 6.4% in 2022-23 to 5.9% of GDP in 2023-24, state deficits are rising from 2.8% in 2022-23 to 3.1% of GDP in 2023-24. It means that the consolidated fiscal deficit is as high as 9% of GDP.
Looking closely into how revenue deficit is reduced, it is found that this has been done in the revised budget for 2024-25 by compressing budgeted expenditure for health, education, scientific departments and transfer to states.

Interestingly, while FD declined, from 6.4 % to 5.8% of GDP, the Capex rose from 2.7% in 2022-23 to 3.2% of GDP in 2023-24 (RE) –a tad less than budgeted.

In fiscal management, there is one noticeable development. While central transfers to states other than devolution, rule- based Finance commission grants declined by about a quarter between 2022-23 and 2024-25 (BE) other transfers in the form of CSS and other grants rose by 14.6% and other grants by 11.0 % respectively.

Again, Finance Commission devolution as % of divisible pool remained at 41% as recommended while devolution as % of Gross tax revenue slumped to 33.16% in 2022-23 and further to 31.84% in 2024-25 (BE). On other hand, the revenue collection under cess and surcharge which fall outside the divisible pool increased from 16.7% in 2021-2022 to almost 21% in 2024-25(BE).

All this indicates two things: (a) growing discretionary transfers and (b) centralization of resources.

On the claim of 25 crore people being lifted out of poverty since 2014 is based on Multidimensional Poverty Index (MPI). Two points can be made. First, MPI based poverty is different from income or consumption based poverty, MPI is calculated using 12 indicators representing health (3), education (3) and standard of living (7) with equal weightage of one-third each. None of these indicators relates to income/consumption. NSSO conducted quinquennial national consumption expenditure survey which facilitated computation of Head count ration based on consumption. Based on this criterion, poverty incidence sharply declined to 21. 9 in 2011from 37.2%in 2004.Since 2011, there was no such survey till the one which is currently underway. Therefore, MPI based poverty measure is not comparable with income/consumption based Head count ratio.

How the following facts match with the vast decline of poverty? First, the data on real wages from the Labour Bureau shows that in the last five years agricultural wages in real terms rose at 0.2% per annum until Nov 2023 while non-farm wage dipped at the rate of 0.9% per annum. Similarly, real wages of regular workers in rural areas declined by 0.5% per annum between 2017-18 and 2022-23 while that of urban workers remained the same (Himangshu). All this is plausible because 42 million workers moved back to agriculture between 2017-18 and 2022-23 leading to a decline in agricultural income per worker.

Second, if the incidence of poverty has declined so much, why is it that 80 core or around 57% of the population needed to be given free or subsidized food under NFSA for another five years?

FM’s proposal to constitute a committee to study India’s population growth so to ensure that the nation is on course to meet the Vikshit Bharat goal by 2047 is rather intriguing in the following contexts: India’s total fertility rate is 2 per woman (NFHS-5) which is below the replacement level of 2.1 even though the fertility rate varies across states and across different social groups. What is more, several developed countries including China being faced with the situation of aging population has reversed population and started offering various types of inducement to women to have more children.

Overall, the interim budget is not just restricted to seeking authorization for spending until the new government assumes office. While no major announcements have been made, budget provisions have been carefully oriented to electoral gains even by way of including longer time provisions such as housing for middle class.

(Authors: Atul Sarma (sarmaatul[atyahoo.com) is a Distinguished Professor at the Council for Social Development & Former Head and Professor of Economics, Indian Statistical Institute, Delhi Centre and Shyam Sunder (shyams.eco[at]gmail.com) is working with an Indian Corporate. Views are personal.)