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A purist may argue that the interim Budget needs to focus only on taking Parliament’s approval for government spending in FY25 till full Budget is presented by the new Government. Four months is long-time for any government not to take any action. However, contrary to the interim Budget FY20, the FY25 interim Budget has stayed away from tax proposal. The Budget focussed mainly on two aspects — fiscal consolidation and stepping up focus on agriculture to course correct to some extent the differential benefit of the ongoing economic growth which is tilted in favour of households of upper income bracket/urban areas.
The two major surprises in FY25 Budget are: a) despite 11.2 per cent growth in net tax revenue in 9MFY24, FY24(RE) net tax revenue growth of the union government is 10.8 per cent, this translates 4QFY24 net tax revenue growth of 9.7 per cent, which appears to be slightly lower and b) only a marginal 2.5 per cent growth in revenue expenditure in FY24, which suggest a tight fiscal policy is being followed by the government.
Being an interim Budget, the main numbers which everyone was looking for were: a) fiscal consolidation path to reach 4.5 per cent by FY26, b) nominal GDP growth for FY26, c) revenue buoyancy, d) capital expenditure growth, and e) market borrowing. The Budget has surprised on fiscal consolidation path and capital expenditure growth. Fiscal deficit in FY24 (RE) is lower than the FY24 (BE) both in level and as percentage of GDP, 10 bps lower fiscal deficit in a year when nominal GDP growth is 160 bps lower than the BE is indeed commendable and will help in achieving 4.5 per cent fiscal deficit target for FY26. Even the FY25 fiscal deficit target is lower than general expectation of 5.3 per cent. The capital expenditure growth of 11 per cent over FY24 (BE) and 16.9 per cent over FY24 (RE) is higher than the expectations. The nominal GDP growth of 10.5 per cent in FY25 is plausible, with real GDP growth in 6.5-7 per cent range and a GDP deflator growth of 3.3-3.8 per cent would translate to 10.5 per cent nominal GDP growth. Average GDP deflator growth during FY14-21 was 3.8 per cent.
The revenue buoyancy assumption for FY25 appears pessimistic. With 10.5 per cent nominal GDP growth the gross tax revenue buoyancy is estimated as 1.09x in FY25 (BE) (FY24(BE): 1.39x) and net tax revenue buoyancy as 1.14x (1.19x). Direct tax buoyancy is expected to decline to 1.24x in FY25 (BE) (FY24(RE): 1.91x), however, indirect tax buoyancy is expected to increase to 0.89x in FY25 (RE) (FY24 (BE): 0.77x). Income tax collections had surpassed corporate tax collections in FY21 (due to Covid-19), it has again surpassed corporate tax collections again in FY23 and remained higher in FY24 (RE) and FY25 (BE). It is expected to be 10.9 per cent higher than corporate tax collection in FY25. Tax rates have not changed in the interim Budget, full budget in July 2024 will give a better picture of FY25 fiscal deficit.
Devendra Kumar Pant Chief Economist, India Ratings & Research. views are personal
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