Past the Fiscal Plan: What Occurred when nobody was Really Observing

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Decoding the Implications of Upcoming Fiscal Events in India

The upcoming budget release followed by the Reserve Bank of India’s (RBI) policy meeting next week encapsulates a seismic wave of financial developments. Any proposed changes could influence the monetary policy dynamics that govern the central bank of India.

Tracing the Importance of the Interim Budget

Although the upcoming budget is provisional, it bears great significance for financial planners. The draft budget will serve as a prelude to the final budget, expected to follow similar financial trajectories. Simultaneously, it will become the befitting stage for state budgets. The government’s commitment to fiscal consolidation will also be signalized by this budget, as it plans to cut the fiscal deficit from the current 5.9% of GDP to 4.5% by 2025-2026.

Understanding the Fiscal Developments

Several key changes took place over the past year in the fiscal landscape, informing the contours of the impending budget. Tax quantities have risen, surpassing the budget estimates by 0.3% of GDP. This will potentially fund an enhancement in subsidies and any special budget day spending packages. The fiscal deficit is anticipated to align with the budgeted 5.9% of GDP in 2023-24.

Given the stride of digitization and accessibility to better tax information, taxes are primed to rise swiftly in 2024-25. Meanwhile, the government may recalibrate the current expenditure following the elections, as capital expenses are projected to remain steady as a share of GDP in 2024-25. Considering these factors, the fiscal deficit is expected to decline to 5.3% in 2024-25, indicating the government remains committed to its fiscal consolidation objectives.

Emergence of State Initiatives

While the central government’s policy held our attention, the real changes unfurled in India’s state finances. After a slow year in spending, states accelerated their expenditures significantly in 2023. The effects of increased spending have spurred market borrowings by Indian states, and it continues to remain high.

The combined central-plus-state fiscal deficit for 2024-25 is projected to settle at 8.2% of GDP, marginally lower than the 8.8% for 2023-24 but still higher than the pre-pandemic level. Consequently, debt levels persist above pre-pandemic figures, with the possibility of staying that way in the foreseeable future.

Revised Borrowing Trends

Besides impacting the debt scenarios, increased state spending has also driven market borrowings. Our analysis suggests a sharp increase in state government borrowings at an alarming rate of 23.3% for 2023-24. Meanwhile, the central government’s gross market borrowing is projected to witness a modest hike of 8.6% year-on-year.

Fiscal Policy Impact on Economic Growth and RBI Policy

These fiscal consolidations continue to play a pivotal role in India’s economic growth. We have seen the focus of spending shift from current expenditure to capital expenditure, which subsequently supports growth. This shift has resulted in a positive fiscal impulse over recent years.

Fiscal policy changes have also influenced RBI decisions. High growth in 2023-24, largely driven by government capital expenditure, is one reason behind RBI’s stringent monetary policy. However, we anticipate a softer stance from the RBI in 2024-25, given the mild negative fiscal impulse and continued food disinflation, paving the way for liquidity easing and potentially a repo rate cut.

Elijah Muhammad