Budget 2024: A clear path to fiscal consolidation

Union Finance Minister Nirmala Sitharaman presents the Union Budget 2024-25 in the Lok Sabha in New Delhi on Tuesday, July 23, 2024. Image: PTI Photo

The Union Budget served a very important purpose. It signalled policy continuity and quelled global speculation that the newly-elected coalition government could influence Narendra Modi to change tracks on reforms and waver from its fiscal agenda to appease political allies.

On the contrary, Finance Minister Nirmala Sitharaman’s record-breaking seventh straight Budget lays bare the Modi 3.0 government’s steadfast focus on job creation and sustainable long-term growth over populist schemes. On the way to achieving its FY26 fiscal deficit goal of 4.5 percent of the GDP, the government did announce sops for women, farmers, and the youth to spur an inclusive and investment-led growth cycle.     

What shone through was the solid path to fiscal consolidation: FM Sitharaman lowered the FY25 fiscal deficit estimate to 4.9 percent from 5.1 percent projected in the Interim Budget in February. It aims to bring down the fiscal gap to 4.5 percent in FY26.

Although there was no change in the budget allocation of Rs 11.11 lakh crore towards capex from the interim budget, the focus was clearly on measures to bolster economic growth via a multiplier-effect. The devil is in the fine-print, but prima-facie, the government has not frittered away funds for electoral gains.

Indeed, there is a focus on social packages to help farmers, women, and the youth to accelerate reforms, growth, and energy transition. There are allocations to support small businesses and agriculture to boost rural income for inclusive development.

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“The Budget signals the continuity of the strong India macro story by pegging the fiscal deficit for FY25 at 4.9 percent, lower than the market expectations. The Budget numbers are credible given that the nominal GDP growth rate is retained at 10.5 percent,” says Deepak Agrawal, CIO-debt, Kotak Mahindra AMC.

The central government pegged receipts and expenditure for FY25 at Rs 32.07 lakh crore and Rs 48.21 lakh crore respectively. It announced a revised estimate of gross market borrowing at Rs 14.01 lakh crore—marginally lower than the Rs 14.13 lakh crore it had projected in the Interim Budget. The shift in the Centre’s borrowing plan reiterates its focus upon fiscal prudence.

“Capital expenditure has been retained at Rs 11.11 lakh crore and revenue expenditure has been marginally increased. The revenue receipt is targeted to grow at 10.8 percent against nominal GDP growth of 10.5 percent, which is conservative. We may have a pleasant surprise, with borrowing being lower than what is targeted. The ten-year yields may trade in the band of 6.9 to 7 percent in the coming months,” says Murthy Nagarajan, head-fixed income, Tata Asset Management.

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Earlier this year, the Reserve Bank of India had declared a record dividend payout of Rs 2.1 lakh crore to the government for FY24. This windfall from the central bank helped the North Block adhere to fiscal discipline. “Extra revenue from RBI has been prudently used by increasing total expenditure only by Rs 50,000 crore, while keeping capital expenditure constant and the balance being utilised in reducing the fiscal deficit,” Agrawal explains.

In fact, a large chunk of the expenditure outlay is allocated for building infrastructure such as roads and houses. Experts believe the budget is non-inflationary.

Most importantly, the clear message from the Modi government is its unwavering commitment towards fiscal prudence. Hopefully this will give global rating agencies the comfort to upgrade their low ratings for the world’s fastest growing major economy which has remained unchanged for 15 years despite India’s economic progress.

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“The budget maintains good fiscal discipline and yet focusses on channelising resources to the desired sections. We remain confident in investing in India and believe in the vision of Viksit Bharat 2047. Many sectors like manufacturing, agriculture, infrastructure and consumption will benefit from this budget,” says Vikas Khemani, founder, Carnelian Asset Management.