Budget 2024: The Challenge Of Balancing Growth And Social Support Amid Economic Realities

Chances are, the National Democratic Alliance 3.0's imminent Union Budget for the full current fiscal — the eleventh such exercise — could be somewhat dissimilar from the recent past.

The pronouncements of the last two fiscals had tilted strongly towards capital expenditure (capex) given the backdrop of robust growth.

This time, given the challenges of rural income growth and consumption demand, a larger tilt towards revenue spending could be pursued.

The interim budget of February initiated some income/employment support through revenue spending. Typically, full budgets stay the course.

National accounts' estimates show private consumption growth this fiscal dropped to a 20-year low of 4% (excluding the pandemic years).

North Block is expected to pay heed to this deceleration. For growth to be sustainable over time, both investment and consumption need to be robust.

The government started treading this path last month, having announced the construction of an additional three crore rural and urban houses under the Pradhan Mantri Awas Yojana, or PMAY. In addition to asset-creation, the Pradhan Mantri Gram Sadak Yojana (for rural roads) and Mahatma Gandhi National Rural Employment Guarantee schemes are large employment generators in rural areas.

They also help cushion the rural economy in times of weather distress. A push to construction under PMAY to urban areas will help alleviate stress resulting from an incomplete recovery of the service sector, which has led to weaker employment opportunities.

How the government strikes a balance between lifting growth through capex and supporting the economically weaker sections and trims the fiscal deficit will be a critical watch in the upcoming budget. But it may not be such a tough ask this time.

Let us do the fiscal math to see the choices government has:

First, the interim budget announced a fiscal deficit target of 5.1% of gross domestic product for fiscal 2025 – lower than the 5.8% of GDP estimated for fiscal 2024. Recent data released by the Controller General of Accounts revealed that in fiscal 2024, the absolute fiscal deficit was, in fact, lower than the estimate, bringing down the fiscal deficit-to-GDP ratio to 5.6% of GDP instead. This resulted from an absolute 5% reduction in fiscal deficit, compared with fiscal 2023 and allows for some fiscal room.

Second, the Reserve Bank of India's record-high dividend payout of Rs 2.1 lakh crore to the central government is Rs 1.09 lakh crore higher than what the interim budget expected and creates additional fiscal room for fiscal 2025.

Now let us lay the macro backdrop to the budget:

The growth momentum is strong with the fiscal 2024 growth pegged at 8.2% and expected at 7.2% (RBI estimate) or 6.8% (Crisil estimate). Inflation is still a stone's throw from the RBI's 4% target but on a downtrend – from 5.4% in fiscal 2024. Inflation based on the Consumer Price Index is expected to soften to 4.5% in fiscal 2025, mainly guided by expectations of a healthy monsoon and lower food inflation. Core inflation, which reflects the demand-side impact on CPI inflation, remains benign and is currently at an all-time low of 3.0%. Some low base effect, the upside from firmer oil prices and recent revision in mobile tariffs could bump it up slightly from last fiscal's 4.3%. Meanwhile, external macro markers also are healthy.

With this macro backdrop, fiscal math and the set of imperatives, the government has two choices.

The first is to use the additional fiscal space to reduce the fiscal deficit-to-GDP ratio and reach 4.6% of GDP, close to the fiscal 2026 target. This implies spending is kept at the same level as in the interim budget and additional fiscal room is used to fill some more of the revenue-expenditure gap.

The second option is to continue the existing fiscal consolidation path (achieve the fiscal deficit target of 5.1% of GDP for fiscal 2025 and below 4.5% for fiscal 2026) and use the additional fiscal room to support the economically weaker segments.

The choice is not easy and there are gains to be reaped either way.

A faster reduction in the fiscal deficit is beneficial in the long run as it can help reduce the government's debt servicing burden. Though India's debt is sustainable given high nominal GDP growth and moderate increase in interest rates, high debt can crimp the government's ability to support growth in the long term. It can squeeze the government's budget with rising interest payments as debt builds, leaving less room for infrastructure spending.

Government debt levels, which were already rising, surged after the pandemic – central government debt stood at 57.1% of GDP in fiscal 2024, up from 50.7% in fiscal 2020, while interest payments rose to 3.6% from 3% of GDP.

A strong growth momentum in the economy allows the government to improve the fiscal finances for the long run and create fiscal room for any economic shocks.

On the other hand, staying put at the interim budget's target will provide additional funds to be allocated to parts of the economy that have suffered income stress and inflation pressures in recent years and are vying for attention. This choice can help propel growth in the short term and create a balance between the capex thrust that is being pursued and aid consumption.

The choice between the two will entail a trade-off as is the case with all economic choices.

But in the current situation, with private consumption growth slacking, core inflation benign and overall growth strong to enable continued fiscal consolidation, the option to leverage the additional fiscal buffer for welfare spending may be a reasonable choice. All this, while keeping the pedal going on the government's capex thrust.

So long as the economy grows at a faster pace than debt, the debt-to-GDP ratio will reduce gradually: in the second option, at a slower pace.

Dipti Deshpande is principal economist and Sharvari Rajadhyaksha economic analyst at Crisil Ltd.

The views expressed here are those of the author and do not necessarily represent the views of NDTV Profit or its editorial team.