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In the 2024-25 vote on account, the government has confirmed its commitment to restoring fiscal consolidation. The combined and Centre’s fiscal deficit to GDP ratios had peaked at 12.5 per cent and 9.2 per cent, respectively, in the Covid year of 2020-21. These were significantly above the FRBM fiscal deficit to GDP norms of 6 per cent and 3 per cent for the combined and the Central Government’s, respectively.
Since then, the government has successfully but incrementally reduced its fiscal deficit to GDP ratio closer the FRBM norm. This fiscal consolidation path has been constrained by the ongoing geopolitical conflicts and the resultant adverse impact on India’s exports. GDP growth has been largely driven by domestic factors, an important component of which is government investment demand. The 2023-24 (RE) for capital expenditure shows a growth of 28.4 per cent which has been reduced to 16.9 per cent in 2024-25 (BE). This reduction is largely responsible for the reduction in the fiscal deficit to GDP ratio to 5.1 per cent in 2024-25 (BE). The question as to whether this would have an adverse impact on growth is worth examining.
Growth prospects
NSO’s first advance estimates for 2023-24 indicate real and nominal GDP growth rates of 7.3 per cent and 8.9 per cent, respectively. The small gap between the two growth rates is due to the unusually low implicit price deflator (IPD)-based inflation of 1.4 per cent. The Budget for 2024-25 indicates a nominal GDP growth of 10.5 per cent. It has been the practice that the Budget does not indicate the underlying real growth. However, combining the Budget’s nominal GDP growth with the real growth given by the Ministry of Finance’s ‘Review of the Indian Economy’ at 7 per cent in 2024-25, it is clear that the underlying assumption for the IPD-based inflation is 3.3 per cent.
Reaching a real growth of 7 per cent in 2024-25 would require investment support both from the State governments and the private sector. The government has extended the 50-year interest free scheme of loans for States’ capital expenditures. With reduced fiscal deficit, there is a possibility that a situation may be created where eventually interest rates could be brought down, enabling increase in private investment expenditures. The IMF (January 2024) however has estimated India’s real GDP growth at 6.5 per cent in 2024-25. It is likely that GDP growth may be in the range of 6.5-7 per cent which would still be more than double the IMF’s projection for global growth at 3.1 per cent.
With the likelihood of continued global headwinds, India may still have to rely heavily on domestic growth drivers, an important component of which is capital expenditure growth. At a budgeted growth of 16.9 per cent in 2024-25, clearly it shows a reduction from 28.4 per cent in 2023-24 (RE). However, with support from continued investment growth at the State level and a pick-up in private investment, an overall growth in investment may still be consistent with a real GDP growth of about 7 per cent.
The Budget arithmetic shows an increase in revenue expenditure growth from 2.5 per cent in 2023-24 (RE) to 3.2 per cent in 2024-25 (BE). As such, total expenditure growth has been limited to 7.1 per cent in 2023-24 (RE) and 6.1 per cent in 2024-25 (BE). The buoyancy of the Centre’s gross tax revenues is estimated at 1.4 in 2023-24 (RE) and 1.1 in 2024-25 (BE). These have enabled a reduction in the fiscal deficit to GDP ratio to 5.8 per cent in 2023-24 (RE) and 5.1 per cent in 2024-25 (BE). The government also shows commitment to further reduce this ratio to 4.5 per cent in 2025-26. Thus, the government is moving in incremental steps towards the FRBM fiscal deficit target of 3 per cent of GDP although that is still some distance away.
The government has done well in containing social sector expenditure. In fact, in the interim Budget, the social sector spending on 10 major schemes including MGNREGA, PMAY, National Health Mission, National Education Mission, Pradhan Mantri Krishi Sinchai Yojna, etc., together amount to nearly ₹4.3-lakh crore in 2024-25 (BE) which is 12 per cent of the government’s primary expenditure. This represents only a modest increase from the corresponding figure of 11.4 per cent in 2023-24 (RE).
The longer term view
The main challenge that the Indian economy faces emanates from global headwinds resulting in a negative contribution of net exports to real GDP growth in 2023-24. Given present trends, this adverse global situation may continue into 2024-25 although the extent of its adverse impact may be less. Under these circumstances, the Budget establishes a healthy balance of pursuing fiscal consolidation while not compromising on growth.
It is also expected that the State governments as well as private investment will also support investment growth. Over the longer term, the government has laid out a detailed plan of productivity and efficiency enhancing measures to augment physical, social, and digital infrastructure.
The writer is Chief Policy Advisor, EY India. Views are personal
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