By Ranen Banerjee, Partner and Government & Public Services (G&PS) Leader, PwC India
Amidst a global landscape of economic uncertainties, Indian Government will attempt to achieve a balance of fiscal prudence and economic growth through the upcoming full budget for 2024-25. Fiscal policy, as outlined through the upcoming budget, could aim to enhance India’s sovereign credit rating to lower Government’s borrowing costs as well as boost the private sector investment cycle with lower capital costs.
S&P Global Ratings raised India’s sovereign rating outlook to ‘positive’ from ‘stable’ in May 2024, while retaining the credit rating at ‘BBB’, based on India’s robust economic growth, improvement in the quality of Government spending and commitment to fiscal consolidation path. India’s sovereign ratings can improve if fiscal deficit reduces to lower the general Government debt on a structural basis, or if there is a sustained and substantial improvement in the central bank’s monetary policy effectiveness and credibility – with inflation staying low on a durable basis. The rating agency has commented that they will consider an upgrade if the fiscal deficit is brought down to 4% and 3% at the central and state government levels respectively.
The Government can thus consider embarking on a more aggressive fiscal consolidation path in the full budget to improve the fiscal deficit target of 5.1% outlined in the interim budget. This should be possible given the continued buoyancy in tax collections, as evidenced from the 23% higher gross direct tax collection in April–May 2024 compared to last year, and 11.3% increase in gross Goods and Services Tax (GST) collections during the same period.
A leg up has also been provided by the high dividend announcement of INR 2.11 trillion, which is 141% higher than dividend payout in FY23. The Government has budgeted INR 1.02 trillion as dividend / surplus from the Reserve Bank of India (RBI), nationalised banks and financial institutions in the interim budget, which shows an additional fiscal headroom of INR 1.09 trillion for the full budget for these line items. The Government can allocate funds ranging from INR 0.47 to 0.80 trillion towards reducing fiscal deficit to a target range of 5% to 4.9% of gross domestic product (GDP), assuming the same level of GDP for FY25 as assumed in the Interim Budget. In addition, there could be some upward revision of the nominal GDP given the uptick in wholesale price index and real GDP growth forecasts by the RBI, which can further reduce the fiscal deficit to GDP ratio. The remaining revenue surplus can be utilised towards increasing allocation for welfare schemes like PM Awas Yojana, Mudra Yojana, PM Kisan and extending the coverage of Ayushman Bharat-Pradhan Mantri Jan Arogya Yojana (AB-PMJAY) in order to fulfil the social commitments of the government.
In addition, Government can mobilise resources through accelerated monetisation efforts – given this is the first year of the Government where socio-political constraints are the least in its tenure.
Another aspect of fiscal consolidation would be expenditure optimisation. Considerable cost reductions have been realised by using technology and direct benefit transfer (DBT) to improve beneficiary targeting. Additionally, there is potential for further cost savings by improving the project management oversight (PMO) of capital projects which can prevent high-cost overruns as well as enable early realisation of the multipliers from completed infrastructure projects.
To further enhance the quality of expenditure, the Government can consider implementing an outcome-based budgeting strategy, or even more rigorous, the zero-based budgeting method. In zero-based budgeting, each budget item begins at zero and alignment with the key outcomes being targeted for a sector and performance must be justified. Although shifting to zero-based budgeting may require some more time, the Government can begin with examining the key performance indicators (KPIs) for each sector. Subsequently, it could evaluate whether various schemes and projects within that sector align with these predetermined performance indicators. A scheme and project rationalisation plan using these principles can be drawn out in the form of a medium-term expenditure framework, providing rolling budgets for programmes till the KPIs are achieved. This will help optimise budgetary allocations as well as reach the stated goal of achieving complete saturation – i.e. 100% coverage of the beneficiaries.
Overall, the Government’s fiscal policy is not merely a financial statement of revenue and expenditure, but also a reflection of its vision for the nation and a way to steer the economy so as to meet the aspirations of the citizens. With robust tax revenues, substantial dividends from RBI and opportunities for asset monetisation, the Government is well-positioned to harmonise fiscal prudence with enhanced funding for social welfare and inclusive growth initiatives, dovetailing with enhanced quality and efficiency of public expenditure. Such judicious fiscal strategy will promote fiscal stability and sustainable growth, therefore bolstering investor trust towards realising the vision of a Viksit Bharat.
