Interim Budget 2024-25: Will 'Modi Guarantees' Break the Budget Deficit?

In 2019, the government targeted three large groups of voters — the middle class, the farmers, and unorganised sector workers — in all, about 75 crore voters. These voters would need to be kept in humour this time as well.

(Photo: The Quint)

An interim budget, close to the commencement of Lok Sabha election campaigning, provides a golden opportunity for the party in power to pack up freebies and populist giveaways in its efforts to win over the voters.

The Modi Government used the Interim Budget in 2019 to woo the middle class by exempting taxable income up to Rs 5 lakh from income tax, freeing up more than 2.5 crore tax-payers which constituted more than 40 per cent of total actual taxpayers.

The government also lured 12 crore farmers with Rs 6,000 free cash (Pradhan Mantri Kisan Samman Nidhi). One installment of Rs 2,000 was released even before the announcement of the Lok Sabha poll. The government contribution in retirement pension was also promised to 50 crore workers belonging to the unorganised sector (PM Shram Yogi Mandhan [SYM]).

Will Finance Minister Nirmala Sitharaman pack up the budget with freebies in the name of Modi's guarantees on 1 February 2024?

'Modi Guarantees' Likely to Overshadow Budget

In 2019, the government targeted three large groups of voters — the middle class, the farmers, and unorganised sector workers — in all, about 75 crore voters. These voters would need to be kept in humour this time as well.

In the course of campaigning for assembly elections in Madhya Pradesh, Rajasthan, and Chhattisgarh, Prime Minister Modi announced many ‘guarantees’. These are freebies, cloaked as 'Modi Guarantees' — LPG gas cylinders at Rs 450, cash transfers of Rs 1,250 to poor women, Rs 2 lakh to poor girls up to the age of 21, and many more.

While many of these guarantees are supposed to be implemented by state governments, the Finance Minister would most likely seize the opportunity to spread the 'Modi Guarantees' across the entire country.

There is significant distress concerning unemployment and wage compression in the unorganised sector. PM SYM has floundered. The Bihar government’s recent announcement to pay Rs 2 lakh to 94 lakh poor families earning less than Rs 6,000 a month has queered the pitch.

The central government has a database of 30 crore unorganised sector workers. Nirmala Sitharaman will be tempted to dole out something substantial for these workers, maybe with a Rs 10,000 payout per annum. For the middle class, will the government increase the tax exemption rebate to Rs 10 lakhs? For farmers, will the government raise the PM-Kisan Samman Nidhi handout to Rs 9,000?

Fiscal Arithmetic is Weaker This Time

The government had budgeted to spend Rs 45 trillion in 2024-25.

A good deal of expenditure aggregating to Rs 17.5 trillion was to be spent on non-current and non-central government expenditures — Rs 10.8 trillion in interest payments, Rs 2.4 trillion in pension payments, Rs 3.1 trillion as mandatory transfers to states (revenue deficit grants and so on), and Rs 1.3 trillion as capex loans to states. There cannot be any savings in these payments/transfers.

The government had budgeted to spend, out of the remaining real budget of Rs 27.5 trillion, Rs 8 trillion on public goods and services (predominantly defence and internal security), Rs 10 trillion on welfare/freebies (food subsidy, fertiliser subsidy, PM-Kisan etc.) and Rs 9.5 trillion for boosting economic growth (primarily infrastructure capex on railways, roads, and PLIs [production linked incentives]).

No savings are possible on defence and internal security expenditures. CapEx (Capital Expenditure) is seen as yielding good political dividends (hundreds of inaugurations and flagging off trains); hence no savings. The government announced a few more freebies — higher subsidies on LPG gas, new LPG connections, and the like. No overall savings there either.

The revenue situation is a bit more colourful. Income taxes have done much better than the budget estimates. GST is well on target. Customs and excise duties have underperformed. Non-tax revenues, thanks to higher dividends from the RBI (Reserve Bank of India) and PSUs (public sector undertakings), will exceed budget estimates. Disinvestment proceeds have disappointed significantly. Again, on the whole, non-debt receipts might increase enough to provide for additional expenditures.

The government had estimated Rs 17.9 trillion as a fiscal deficit at 5.9 per cent of the estimated Rs 301.8 trillion GDP. In advance, the 2023-24 GDP has been estimated at Rs 296.6 trillion; 6 per cent there amounts to 17.8 trillion, very close to the budgeted fiscal deficit.

The Fiscat Deficit Bugbear

The government was wedded to fiscal deficit discipline in 2019 — less than 3 per cent of GDP by 2020-21. That commitment was thrown to the winds in the 2021-22 Budget. The new, loosely-worded promise is to bring the fiscal deficit down to 4.5 per cent of GDP by 2025-26.

At about 6 per cent of GDP, the fiscal deficit in 2023-24 is 1.5 per cent away from the goal.

To be seen taking any credible shot at the goal, the Finance Minister would need to cut the 2024-25 fiscal deficit by about half of the gap, or 0.75 per cent, to peg it at 5.25 per cent of GDP.

The government is likely to estimate the 2024-25 GDP at Rs 327.7 trillion, building in 10.5 per cent nominal growth over the estimated 2023-24 GDP of Rs 296.6 trillion. Reducing the fiscal deficit by 0.75 per cent will require a reduction of about Rs 2.5 trillion in expenditures which will break the budget.

Will the compulsions of delivering on 'Modi Guarantees' persuade the government to postpone fiscal deficit consolidation to another day?

Delivering Modi Guarantees is Urgent; Fiscal Consolidation Can Wait

The government would be keen to expand capital expenditure, but I will deal with this in another piece.

Delivering 'Modi guarantees' might cost, on average, Rs 5,000 to 10,000 per person for 50 crore targeted beneficiaries, costing another Rs 2.5 to Rs 5 trillion or about 0.75 to 1.5 per cent of GDP every year.

With the existing budget arithmetic offering no opportunity to permit the expansion of welfare/freebies of this magnitude, the government would have to probably expand the fiscal deficit further. Beyond 6 per cent?

That might hurt the equity markets, which are otherwise gung-ho on government CapEx despite high fiscal deficits. The government would not like to upset the market's apple cart.

It will be interesting to see whether the 'Modi Guarantee' expenditures will be phased out or tax revenue, non-tax, and disinvestment receipts are padded up. Most likely, the interim budget will play to the imperatives of impending Lok Sabha elections. Fiscal consolidation can wait.

(The author is a former Economic Affairs Secretary and Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)