A back-to-basics Budget

When one talks of a household budget, no one thinks of an adrenaline-inducing exercise where exciting new spending plans are unveiled. Yet, the Indian markets, assisted by industry associations and the media, have come to regard the Union Budget as a kind of jamboree where the government distributes largesse to sections of industry.

The original purpose of the Budget is to inform the public about whether the government has been able to bump up its income, spend within its means and allocate its resources prudently for the coming year. The interim Budget has delivered on these basics. Therefore, one can safely ignore the stock market not being excited about it.

Since FY24 is the first normal year for the economy post-Covid and the final year of NDA’s second term, we analysed for the progress on key Budget metrics in the last five years.

Buoyant income

The NDA government has been quite resourceful at deploying TDS and TCS (tax deduction and collection at source) on all manner of transactions to unearth ingenious routes to tax evasion.

As a result, its total receipts (without accounting for borrowings) have expanded at 8.1 per cent per annum from ₹20.8-lakh crore to ₹30.8-lakh crore between FY20 and FY25 (budget estimates), despite Covid interrupting.

From Covid lows of FY21, receipts have raced at 16.1 per cent per annum. Revenue receipts have brought in all of the growth, while capital receipts have dwindled. This is not a bad thing, as counting asset sales as part of income is not a great accounting practise.

Within revenue receipts, it is individual taxpayers who have generously contributed to the tax kitty, while companies have dragged their feet. Personal tax collections have sprinted at a 15.2 per cent annualised rate in the last five years while corporate tax mop-ups have dawdled at 6.3 per cent.

GST collections, also borne by consumers, have grown at about 10 per cent a year. Given that the Covid hit to personal incomes was presumably higher than that to companies, it is time to bring personal tax rates on par with corporate tax.

Expenses grow faster

As with many households, the government’s expenses have grown at a much faster clip than its income. Budgeted expenses have grown at 11.3 per cent per annum from ₹27.8-lakh crore to ₹47.6-lakh crore from FY20 to FY25.

This is partly on account of the Covid stimulus which spiked expenses by 25 per cent in FY21. In the last four years, the government has managed to slow down expenditure growth to about 8 per cent. But this has not helped arrest the widening gap between its income and expenses. The fiscal deficit has more than doubled in absolute terms from ₹7-lakh crore in FY20 to ₹16.85-lakh crore budgeted for FY25.

But with the economy growing at a fair clip, fiscal deficit as a percentage of GDP has moderated from the Covid high of 9.2 per cent (FY21 actuals) to 5.1 per cent in budget estimates. The progress on revenue deficit has been better, with the FY25 estimate at 2 per cent against the Covid high of 7.3 per cent.

Market borrowings are set to flatten out at a time when Indian government bonds are being opened up to a new set of foreign buyers, on their inclusion into global indices.

This is why bond markets greeted the Budget with a rally.

The expenditure mix is changing for the better. Capital expenditure, at ₹5.2-lakh crore made up less than a fifth of total expenditure five years ago. But at Budget Estimates of ₹14.9-lakh crore for FY25, they will make up 31 per cent in FY25.

While there can be hair-splitting about what is counted as capital outlays, it is more productive for the economy than revenue expenses.

Interest, salary and subsidies

Committed revenue expenditure which cannot be dialled back is a worry for the exchequer. Interest on older borrowings at ₹11.9-lakh crore, will eat up 25 per cent of all revenue expenses in FY25, not much changed from 24 per cent five years ago.

Belt-tightening has however been achieved on government salaries and pensions, which are down from 14.6 per cent of expenses to 8.3 per cent. Subsidies on food, fertiliser and fuel have also dipped from 12 per cent to 8.5 per cent. But whether this happy state of affairs can continue if global energy prices shoot up again is moot.

Frugal estimates

Budgeting can be a wasteful exercise if projections are not realistic. The interim Budget has been reasonable on this score. It budgets for revenue receipts to rise 11.1 per cent, with tax revenue growth pegged at 12 per cent. Not a tall ask, if nominal economic growth comes in at the assumed 10.5 per cent.

The fiscal deficit has been cut down to 5.1 per cent by budgeting for just a 6 per cent increase in total expenditure.

Capital outlays have been hiked by 11.1 per cent within this. Basically, after propping up the economy post Covid, the Centre is keen to hand the baton to private actors.

Allocations have been shuffled among Central schemes, with rural housing, drinking water, highways and MGNREGA bagging larger slices of the pie while smart cities, green revolution and Swacch Bharat get less.

In the interests of frugality, it would have been good if the long list of welfare schemes clamouring for allocations had been whittled down. But they have only grown, from 122 in FY20, to 170 in the FY25 Budget.