Election year nightmare: Can Budget 2025 tame the fiscal deficit beast

Budget 2025
Election promises meet fiscal reality as Union Budget 2025 undertakes a tightrope walk between spending and fiscal prudence.

Budget 2025: As India approaches the 2024 general elections, the spotlight is on the Union government’s fiscal strategy, particularly in the context of the upcoming interim budget for financial year 2024-25. With predictions pointing towards a fiscal deficit target of 5.2-5.4% of the GDP, a delicate balance looms on the horizon. This fiscal forecast, drawing consensus from a range of indicators and rating agencies, sets the stage for what could be a defining moment in India’s economic and political journey. The Union Budget 2024-25, pivotal in its timing and impact, holds the key to navigating through these turbulent times.

The government faces the challenging task of marrying fiscal prudence with the imperative of supporting its most vulnerable citizens. Austerity measures, while necessary for economic stability, must not come at the cost of essential social welfare programmes in areas such as healthcare and education. The consequences of neglecting these sectors are far-reaching, encompassing not just immediate hardships but also long-term economic repercussions. The potential for increased health disparities, educational gaps, and social unrest cannot be ignored.

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Conversely, a well-balanced approach that safeguards vital social programmes can pave the way for sustainable economic growth through a healthier, better-educated workforce. The upcoming budget, therefore, presents a unique opportunity for the government to demonstrate fiscal responsibility without compromising on its commitment to social welfare.

Experts advocate for the government’s continued frugality in revenue expenditure, emphasising the pitfalls of succumbing to populist spending pressures during budget formulation. Despite this, the government, which has previously committed to reducing the fiscal deficit to below 4.5% of the GDP by 2025-26, might still include populist measures in the budget.

To achieve genuine long-term fiscal consolidation, the government needs to focus on improving spending efficiency, especially given the substantial committed expenditures. Meanwhile, the fiscal discipline of both central and state governments remains questionable, especially post-COVID-19. The financial strains faced by many states and the repercussions of poor fiscal management, as seen in countries like Sri Lanka, have started to resonate with voters, who increasingly understand the implications of government spending.

Fiscal discipline cannot be achieved solely through Union government’s efforts. The varying financial situations of different states necessitate a closer look at their individual fiscal health. States like Punjab and Rajasthan face mounting debt burdens, while others like Tamil Nadu maintain relative stability. Addressing the diverse fiscal landscapes of individual states requires targeted interventions beyond a one-size-fits-all approach. Implementing measures like improved financial management capacity building and incentivising fiscal responsibility among states can strengthen the overall fiscal position of the country.

Collaboration between the central and state governments, through initiatives like knowledge-sharing and resource allocation based on need, is crucial to navigate the varying fiscal landscapes and ensure sustainable consolidation across the nation.

The impact of election promises on taxpayers typically becomes evident 12-18 months after a new government’s formation, as the promised schemes reach full implementation.

The fiscal deficit target of 5.9% of the GDP for FY24 is under threat from slow GDP growth, disinvestment issues, and escalating subsidy costs. Yet, economists remain optimistic that the government can mitigate these risks through increased non-tax revenue and cost-cutting measures in key ministries. The government is likely to exceed its fiscal deficit target due to slightly higher spending than budgeted.

The fiscal deficit represents the difference between the government’s total income and its total expenditure. Although the Union government’s capital expenditure has slowed in recent months, it has increased by about 31% for the year. However, the imposition of the model code of conduct in the upcoming quarter, due to elections, may hinder the government’s ability to meet its annual capex targets. Additionally, slower nominal GDP growth poses a challenge, potentially leading to a marginally higher fiscal deficit ratio.

Interim Budget 2025 on Feb 1

Finance Minister Nirmala Sitharaman is set to present an interim budget on February 1, covering essential expenses until the formation of a new government. This budget, being a vote on account, will primarily focus on necessary expenditures and a general assessment of capital expenditure.

India’s vibrant informal economy, while often overlooked, contributes significantly to economic activity, and holds immense potential for bolstering government revenue. Integrating this vast sector into the formal economy can be a critical step towards sustainable fiscal consolidation. Streamlining regulations, simplifying tax structures, and incentivising formalisation could encourage informal businesses to contribute to the formal tax base.

This, in turn, would provide the government with a stable and reliable source of revenue, reducing dependence on volatile sources like disinvestment. However, integrating the informal sector requires sensitivity and nuance. Striking a balance between encouraging formalisation and avoiding excessive burdens on small businesses is key to unlocking the true potential of this untapped economic driver.

The interim budget is likely to prioritise capital spending, particularly in sectors like roads, railways, and defense, albeit at a moderated pace. FY25’s capital expenditure is expected to increase by 20%. The disinvestment target for FY25 is projected to be set below Rs 50,000 crore to avoid budgetary disruptions from significant shortfalls in such receipts. For the previous fiscal year, the government achieved only about one-fifth (Rs 10,050 crore) of its Rs 51,000 crore disinvestment target.