Budget 2024: Fiscal Consolidation May Require Capex Trade-Off

Staying the course of fiscal consolidation for the government in the upcoming interim Union budget could be a trade-off between lower capital expenditure and subsidies as these factors exert pressure to the fiscal glide path, according to economists.

The government has said that it aims to maintain fiscal deficit at 5.9% of GDP in FY24, on its way to reducing it to 4.5% of GDP in FY26. The larger pressure emerges from a ticking timeline and growing global challenges that impinge on subsidies, economists said.

"...our expectation is also that if we have to hold on to the medium-term fiscal deficit target, there is just two more years to achieve it. So, at least half the gap between where we are in FY24 and where we need to be in FY26 needs to be met in FY25," Aditi Nayar, chief economist at ICRA, told NDTV Profit.

This means a modest revenue expenditure growth and limited scope for increasing capital expenditure by about 10% to the actual capex turnout in FY24 to reach a fiscal decifit closer to 5.3% in FY25, she said.

Lekha Chakraborty, a professor at the National Institute of Public Finance and Policy, said that the government should focus on its "fiscal marksmanship" as expenditure compression comes with macroeconomic consequences.

"...we need to look into the budget credibility or fiscal marksmanship question from the perspective of the disinvestment proceeds (also) because it's not working out. For now, taxes are buoyant, so the path to consolidation through this tax buoyancy is okay..," she said.

Nayar said that in FY25, capex can grow by about 10% to balance out the math. "For every 10 basis points of higher fiscal deficit, that we're okay to live with, we could have higher capex of Rs 32,500 crore or so," she said.

Yuvika Singhal, an economist at QuantEco Research, expects FY25 to be the year that capex begins to fire on all cylinders.

Singhal explained that government capex served well against the background of Covid-19, but the question remains on whether it has helped crowd private investment.

"...we have seen the buck moving on private capex, but not probably to the extent and desire we wanted; but we have seen the needle moving somewhat materially in the course of FY24. Probably, once the uncertainty related to the election cycle is past us, we could see a much more comprehensive build-up in the private capex cycle," she said.

"We have historically seen that typically in two to three quarters before the general elections, the corporates do not announce new investments, typically because they don't want to risk that uncertainity," Singhal said.

However, the government has continued to push towards more private investments.

Speaking at a CII-DEA event in December 2023, Chief Economic Advisor V Anantha Nageswaran said that the current decade will be a period of uncertainty.

"...the corporate sector has to accept uncertainty as a given for the rest of the decade and actually start to invest, because waiting for the demand to arise before they start investing will be actually to delay the onset of such demand conditions," he had said in his special address.

The CEA, in his outlook after H1 FY24 GDP data release, also noted that the private sector will attain stronger investment growth following the strengthening of corporate and bank balance sheets, supported by the government's capex push in the rest of the year.

Sticky Subsidies

Another element of expenditure that continues to remain on economists' radar is the governemnt spend on subsidies.

In December 2023, the government sought the Parliament's approval for additional outgo of Rs 58,000 crore towards the government-backed employment guarantee scheme MGNREGA, fertilisers and fuel subsidies. The total additional spend was pegged at Rs 1.29 lakh crore, much of which (Rs 70,968 crore) was matched by savings.

Nayar said that this may not be enough. "...we do think that there needs to be another supplementary in this quarter, particularly for food subsidy..." she said. More funds would be required in the fourth quarter of FY24 for food subsidy and the Mahatma Gandhi National Rural Employment Guarantee Scheme based on current data, according to her.

While there is no clarity on whether the government would extend its current allocation and stress the fiscal deficit, Nayar expects that the increase in revenue expenditure would be matched by capital expenditure shortfall.

Fertiliser prices may come down, given global prices have cooled from their highs, she said. "...we're hopeful that next year, if things turned out to be relatively calm, at least on the fertiliser subsidy, we're expecting there to be some savings between FY24 and FY25, which will give us a little bit of cushion to really fund other priorities that the government may choose to fund next year," Nayar said.

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