Interim Budget: Centre likely to focus on capex, fiscal deficit cuts

The Interim Budget of 2024, mainly for vote-on-account (routine approvals), is not likely to see major policy changes.

The focus will be on the government's capital expenditure (capex) and the government’s efforts to reduce the fiscal deficit, which impacts economic growth and government security yields.

Fiscal deficit to be at 5.3 percent

ICRA, a rating agency, has forecast the fiscal deficit for the financial year 2025–26 (FY2025) will be 5.3 percent of the GDP, between the expected 6.0 percent for FY2024 and the long-term goal of less than 4.5 percent by FY2026. The government plans to increase its capex to Rs.10,20,000 crore for FY2025, 10 percent more than FY2024.

For FY2024, the Centre’s revenue might exceed the budget estimate by Rs. 50,000 crore, primarily due to higher tax and non-tax revenues. Total spending is likely to be close to the budget estimate of Rs. 45,00,000 crore. The fiscal deficit might reach Rs.17,90,000 crore, about 6.0 percent of the GDP.

In FY2025, ICRA expects the government to continue reducing its fiscal deficit. However, the growth in capex might be slow compared to the post-Covid years, which could affect economic growth. ICRA anticipates an 11 percent increase in gross tax revenues, led by direct taxes and GST collections. Considering market uncertainties, the disinvestment target might be less than Rs. 5,000 crore.

Revenue expenditure to grow

Revenue expenditure is expected to grow by 4 per cent, and the government might set aside Rs. 10,20,000 crore for capex in the budget, a modest 10 per cent year-on-year increase.

ICRA predicts the fiscal deficit to be 5.3 percent of the GDP in FY2025, leading to a total deficit of Rs. 17,10,000 crore, lower than the Rs. 17,90,000 crore for FY2024. Higher capex could make it challenging to reduce the fiscal deficit. The general government deficit may likely decrease to 8.3 percent of the GDP in FY2025 from 9.2 percent in FY2024.

The government's revenue receipts grew to Rs. 17,20,000 crore in April–November FY2024, a 20.9 percent year-on-year increase. Direct taxes increased significantly, and the government transferred an additional Rs. 72,960 crore to states in December 2023. To meet the fiscal year's budget estimate, the government must release Rs. 27,000 crore to states in the fourth quarter of FY2024.

Subsidies

The outlay for major subsidies (food, fertilizer and fuel) for FY2025 is estimated at Rs. 3,90,000 crore. This is about 6 percent lower than the expected Rs. 4,20,000 crore for FY2024, an overshooting from the budget estimate (BE) of Rs. 3,70,000 crore. The food subsidy bill for FY2025 is expected to be upwards of Rs. 2,00,000 crore, following the Cabinet’s decision to provide free food grains under the NFSA (National Food Security Act) for five years starting January 2024.

The subsidy requirement for fuel for FY2025 is likely to be pegged at Rs.11,600 crore. This is modestly higher than the outgo in FY2022-23 and expected for FY2024 but much lower than the expenditure in FY2021. For nutrient and urea-based fertilizers, the combined subsidy requirement for FY2025 is estimated at Rs. 1,40,000 crore–Rs.1,50,000 crore. This is lower than the likely outgo in FY2024, which is between Rs.1,90,000 crore and Rs. 2,00,000 crore. The government may initially allocate less than the total expected subsidy amount in the budget estimate for FY2025 and adjust it during the year, as has been the case in previous fiscal years.

While the government is expected to continue focusing on fiscal consolidation and capex growth, the pace might be slower than in recent years, impacting economic growth. The fiscal deficit target for FY2024 will likely be met, but achieving the medium-term target by FY26 remains a challenge.

Budget expectations

The Federal spoke to some of the stakeholders about what they expect from the interim budget. Here is what they expect.

Akhil Chandna, Partner, Grant Thornton Bharat: As the budget is around the corner, there is a lot of anticipation and expectation on the personal taxation front. Since the budget is a vote-on-account/interim budget, major announcements are not expected. However, taking a cue from the last interim budget presented in 2019, when certain tax proposals were introduced, there are also some expectations this time.

Taxpayers in the lower- and middle-income categories are hopeful for some relief in the form of a reduction in tax rates or an increase in tax slabs. In recent years, the government has taken several steps to simplify the tax structure and make it more taxpayer-friendly. Introducing lower tax rates for individuals under the new tax regime was a welcome move, but it lacked the desired impact due to parity with corresponding deductions and exemptions under the old tax regime. Therefore, taxpayers expect the government to strike a balance between lower tax rates under the new tax regime or increasing the threshold for various deductions/exemptions to incentivise savings and investments.

Rakshit Agarwal, Co-Founder, Rupicard – a mobile-only, secured credit card fintech: To promote the use of digital payments, especially credit cards integrated with the Unified Payments Interface (UPI), it is crucial for the government to actively initiate programmes focused on expanding the merchant acceptance landscape. A strategic approach may involve implementing incentives for small-scale merchants adopting credit card transactions or reducing Goods and Services Tax (GST) rates linked to Merchant Discount Rates (MDRs) for credit card transactions. Such measures have the potential to substantially increase credit card usage among merchants, fostering a faster shift towards a cashless economy.

Adelia Castelino, Co-Founder and Managing Director, In-Solutions Global: As we approach the Union budget, policymakers must recognise the transformative potential of Central Bank Digital Currencies (CBDCs). Integrating CBDC into our financial infrastructure will enhance transparency, foster financial inclusion, and bolster economic resilience. A forward-thinking budget should prioritise research, collaboration, and innovation in this domain to ensure India's leadership in the global fintech landscape.

Reforms should also be considered on introducing outcome-based incentives for fintech players who contribute to the ecosystem, which should encourage financial inclusion for the unbanked, empowering micro-businesses to handle digital currency like CBDC with ease, making it their preferred choice as compared to cash.

Atul Monga, CEO and Co-founder of BASIC HOME Loan: The Indian real estate sector has specific expectations from the interim budget, particularly concerning home loans and affordable housing. The industry is advocating for a significant increase in the tax deduction for home loan interest under Section 24 of the Income Tax Act. Currently capped at Rs 2 lakh, there is a push to raise this limit to at least Rs. 5 lakh. This adjustment is expected to revitalise the market, especially in the budget-homes segment.

Furthermore, the government is expected to reevaluate the qualifying criteria for affordable housing. The current price limit of up to Rs 45 lakh for affordable housing is seen as unrealistic for major cities. For instance, the metro city's budget can be increased to around Rs 70–75 lakh. Adjusting these limits would make more homes accessible to a broader range of buyers, enabling them to benefit from government subsidies and reduced GST rates.