On February 1, Finance Minister Nirmala Sitharaman is set to unveil the Interim Budget for the fiscal year 2024-2025. Typically presented by a government in its final year before Lok Sabha elections, this budget will focus on fiscal consolidation, aiming for controlled growth in capital expenditure.

Given that the upcoming Lok Sabha elections are scheduled for April-May, the funds allocated in this interim budget will sustain the country until the new government assumes office post-elections.

While serving as a practical arrangement to address the interim period, it is important to note that major policy announcements are generally avoided, preventing potential financial burdens on the succeeding government that will present the full Union Budget.

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Sarkar ki Aamdani vs Kharcha

The given pie chart is self-explanatory. The borrowing and other liabilities (34%) constitute the government’s major sources of income. Following this, GST contributes 17%, while Income and corporate tax each contribute 15% to the income.
On the other side, interest payments pose a significant challenge, accounting for over 20% of the expenditure. This is followed by the states’ share of taxes and duties at 18%, and the central sector scheme at 17%.

As mentioned in the given table, the focus in the interim budget would be on these key points. The government is likely to peg the fiscal deficit near 5.40% of the GDP, compared to 5.90% in FY 23-24.The gross borrowing is expected to be slightly higher than the previous year, but higher repayment of past loans could keep the net borrowing below Rs. 11.75 lakh crores.On the capital expenditure side, more than 10 lakh crores could be estimated. Additionally, other observatory points include divestments and RBI dividends.

Given that it’s an election year, the budget is anticipated to find a middle ground between populist measures and reformist(fiscal) measures.

No more Slippage Issue:

The Fiscal slippage refers to a situation where a government exceeds its planned or targeted fiscal deficit or deviates from its fiscal consolidation path.

While examining the table, attention is drawn to the fiscal year 2013-2014, a period during which India was labeled as one of the Fragile Five.

Despite facing challenges both internationally and domestically, the economy managed to achieve its fiscal consolidation goal in the mentioned fiscal year.

However, this accomplishment was largely attributed to a reduction in spending, specifically in planned and capital expenditures.

Further analysing the above table, it is evident that India has effectively maintained its fiscal deficit close to the set target, except during the period affected by the COVID-19 pandemic.

For the fiscal year 2023-24, India aims to limit the fiscal deficit to 5.9%. In the initial eight months of this fiscal year, the central government’s fiscal deficit reached only 50.7% of the annual target, in contrast to 58.9% in the previous year.

This was achieved through prudent control over expenditures in recent months, coupled with improved tax collections, contributing to the effective management of the fiscal deficit. There is a higher probability that India will avoid fiscal slippage and adhere to the predetermined fiscal deficit target.

India’s Fiscal Deficit Management:

Over the last decade, India has undertaken various measures to control its fiscal deficit, including rationalizing subsidies and implementing the Goods and Services Tax (GST) in 2017.

GST, a landmark step in creating a unified indirect tax system, aimed to reduce tax evasion and increase government revenue. Despite initial challenges, it has played a pivotal role in enhancing fiscal discipline.

Additionally, the government has focused on fiscal consolidation through prudent expenditure management, targeting subsidies more effectively to reduce leakages, and consistently maintaining a target-driven approach.
Efforts also include boosting revenue through divestment and asset monetization. Overall, India has prioritized fiscal consolidation through strategic reforms and disciplined fiscal management.

How few measurements could lead to higher FDI flows…

In the upcoming budget, the proposed measures across various sectors hold the potential to attract significant foreign direct investment (FDI) and foreign institutional investment (FII), contributing to India’s economic growth.

The introduction of a 10% tax on long-term capital gains in the real estate sector, coupled with exemptions for reinvested gains from residential property sales, is likely to bolster investor confidence by providing clarity and incentives for long-term investments.

In the education sector, the emphasis on industry-academia collaboration through the ‘National Research Foundation and budget incentives for data sharing and technical support creates an environment conducive to foreign collaborations and partnerships.

The hospitality sector’s call for rationalized GST rates and credit provision can enhance affordability, potentially attracting global investors interested in India’s flourishing travel and hospitality industry.

The anticipated support for the medical technology sector, with a focus on Atmanirbhar Bharat initiatives, is likely to attract FDI by positioning India as a hub for health-tech innovation.

The Gems and Jewellery industry’s request for reduced import and customs duties aligns with the government’s Make in India vision, potentially attracting foreign investors seeking a conducive trade environment.

Finally, transformative reforms in the auto sector, particularly incentives for electric vehicles and sustainable practices, can position India as a key player in the green energy segment, attracting FDI from environmentally conscious investors.

That apart, there’s talk about potentially unifying capital gains tax for all financial assets, including equity and debt. When assets like gold, land, or shares are sold after a prolonged holding period, the gains are subject to a special LTCG tax rate, distinct from the regular slab rate.

These measures collectively contribute to a positive investment climate, fostering FDI and FII inflows. According to recent data, India witnessed a 27% increase in FDI inflows in the last fiscal year, reaching USD 81.72 billion, showcasing the country’s attractiveness to global investors.

Considering the impact of the budget on the Indian Rupee, it is likely that the government will address key aspects such as fiscal deficit, capital expenditure, subsidies, and the introduction of new programs/packages.

Market expectations may not deviate significantly; however, the government is expected to present a budget that promises benefits for everyone, from common people to businessmen and investors.

This is anticipated to be a win-win budget, potentially having a positive impact on the Rupee. It’s worth noting that the recent fiscal trend has been well-managed, with negligible risk of slippage.

This is a positive factor for the currency. Overall, the Rupee is expected to focus on its key fundamentals and fair value, aiming to move towards the range of 82.50 to 82.00 over the next 2 to 3 months.

(The author is MD, CR Forex Advisors)

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)

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