Upcoming budget & Growth targets
The final Budget for 2024-25, to be presented on July 23, would be the first Budget of the new government.
It is an opportunity for the government to provide its medium-term growth and employment perspective along with its policy priorities.
Given the continued global economic slowdown, India will have to rely largely on domestic growth drivers.
The short-term objective could be to ensure a minimum 7% growth
while the medium-term objective may be to sustain the real GDP growth rate in the range of 7%-7.5%
This would be facilitated by bringing down the fiscal deficit relative to GDP from the current levels to the Fiscal Responsibility and Budget Management (FRBM) consistent level of 3% in the next three to four years.
The employment objective is not independent of the growth objective except for an additional emphasis on the relatively more labour-intensive sectors in the composition of output.
To ensure a 7% plus growth on a sustained basis, we require a real investment rate of 35%
As in the latest available data for 2023-24, the real investment rate measured as gross fixed capital formation (GFCF), as percentage of GDP, was 33.3 for 2022-23 and 33.5 for 2023-24
Although gross capital formation (GCF) is marginally higher, we need to ensure a level of GFCF at 35% or so in the medium-term to sustain a growth of 7% plus, assuming an incremental capital output ratio of five
Challenges
On the demand side, the contribution of net exports to GDP growth has remained negative or low in recent years due to subdued export prospects (0.5% points in 2022-23 and (-)2.0% points in 2023-24)
Until export demand picks up and private investment gathers momentum, India will have to rely on government investment demand to provide support to growth.
Estimates indicate that even if the revenue expenditure growth is enhanced to 8%, this would provide additional revenue expenditures close to ₹3 lakh crore over 2023-24 actuals.
This would still leave fiscal space to provide for capital expenditure growth of 19.2% in 2024-25 which would be required for supporting investment demand resulting in infrastructure expansion that is consistent with the government’s medium-term objectives.
Some tax rationalisation measures may be undertaken as long as they do not imply any significant revenue sacrifice
Fiscal Responsibility and Budget Management Act
FRBMA enacted in 2003, aims to promote fiscal discipline, transparency, and accountability in the management of the India’s finances.
Fiscal Responsibility and Budget Management Act, 2003 is regulated by Department of Economic Affairs, Ministry of Finance.
FRBMA ensure intergenerational equity in fiscal management and long-term macro-economic stability by reducing fiscal deficit.
It further ensure effective conduct of monetary policy and prudential debt management consistent with fiscal sustainability
FRBM targets
It is important to signal commitment to the FRBM targets in the short to medium term.
If the fiscal deficit to GDP ratio is brought down to 5.1% in 2024-25, it may take another three to four years to bring it down to 3% of GDP.
As the fiscal deficit to GDP ratio is reduced and nominal GDP growth is kept in the range of 11%-11.5%, the debt GDP ratio and the interest payment to revenue receipts ratio would also come down, facilitating the reduction in fiscal deficit, thereby creating a virtuous cycle.
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