Bibtex
Endnote
RIS
The second budget of BJP-led NDA 3.0 government will be presented to Parliament on February 01, 2025. Since 2003-04, the fiscal policy management of India has been rule- based with two amendments (2012 and 2018) in the Fiscal Responsibility and Budget Management Act, 2003. The FRBM Act currently has prioritised the deficit rule (fiscal deficit – 3% of GDP) and debt rule (40% of GDP). In India, we have not so far introduced any expenditure rule.
An expenditure rule in the FRBM Act, such as a capex target of 3 per cent of GDP can be considered
The union budget for 2024-25 in its budget estimates placed the fiscal deficit at 4.9 per cent (as against the 3 per cent prescribed) and a total debt at 56.8 per cent (as against the prescribed 40 per cent). The union budget 2025-26 will be presented against the backdrop of geopolitical tensions, slow-down in economic growth in India measured in terms of real GDP (6.4 per cent in 2024-25 as against 8.2 per cent in 2023-24) and inflation rate measured in terms of the combined consumer price index (CPI-C) at 4.8 per cent for 2024-25 (RBI’s governor statement on December 06, 2024) as against the flexible inflation targeting (FIT) of average 4 per cent.
While presenting the budget document for 2025-26, the finance minister will set out the revised estimates for 2024-25 and budget estimates for 2025-26. The actual data for 2024-25 are available up to April-November 2024. Based on available data, an estimate of the outcome for revised estimates for key budgetary variables viz., revenue receipts, non-debt capital receipts, revenue expenditure, capital expenditure, total receipts, total expenditure, revenue deficit and fiscal deficit is made here. The estimates assume the growth rates of the above-mentioned variables (except fiscal deficit and revenue deficit) for the period December 2024 to March 2025 for which actual data are not available. The calculated growth rates are presented in table 1.
Further, here is a comparative picture of budget estimates for 2024-25 vis-à-vis the revised estimates for 2024-25 in table 2 and table 3.
As it may be seen from table 3, as estimated, revenue receipts, non-debt capital receipts and capital expenditure could record a decline. The decline in revenue receipts could contribute to an increase in the revenue deficit by 0.8 per cent of GDP. An increase in the revenue deficit would imply dis-savings of the government, adversely impacting economic growth. Besides, a decline in capital expenditure by 1.1 per cent of GDP would further contribute to a deceleration of economic growth. Inter alia, the adverse impact of the decline in capital expenditure coupled with the increase in revenue deficit has already been contributed to the deceleration in real economic growth in 2024-25 to 6.4 per cent as against 8.2 per cent in 2023-24. The decline in non-debt capital receipts by around 0.1 per cent of the GDP coupled with the decline in revenue receipts and capital expenditure as mentioned above contributed to marginally increase the estimated fiscal deficit to GDP ratio (table 3).
The budget estimates for 2025-26 largely will be based on the outcome for 2024 - 25. Even though India’s economy has been performing better than that of many of its peers, however, compared to our own past record, the rate of economic growth is lower than the past levels. Therefore, the priority of union budget 2025-26 will be to revive growth to a higher trajectory. To the extent that rule based fiscal policy in terms of the FRBM Act has been the guiding force for fiscal policy strategy and management in a medium-term perspective, the following options for the present FRBM Act must be considered.
First, the authorities may consider elimination of revenue deficit within a timeframe of three years by 2027-28. This will help enhance the savings of the government, thereby supporting growth.
Second, the authorities may consider reducing the fiscal deficit to three per cent within a timeframe of three years.
Third, the debt to GDP ratio of 40 per cent in the FRBM act is a stringent rule. The authorities in the medium-term framework may consider reducing the debt to GDP ratio to 50 per cent from 56.8 per cent (estimated for 2024-25) within a period of three years.
Fourth, the standard budgetary practice has a tendency to place capital expenditure at a higher level in the budget estimates and subsequently reducing the same to a lower level to show a lower fiscal deficit to GDP ratio. This deviation is against prudent fiscal management and shows poor fiscal marksmanship. This has happened during 2024-25. To arrest this tendency, the authorities may consider fixing the capital expenditure to GDP ratio at 3 per cent.
To sum up, the union budget 2025-26 should aim at amending the FRBM target in terms of reintroducing the elimination of revenue deficit as it was in FRBM Act, 2003, reducing fiscal deficit to 3 per cent of GDP, and enhancing the debt to GDP ratio to 50 per cent in a period of three years in its medium-term perspective. In addition, the authorities may consider introducing an expenditure rule in the FRBM act by introducing a target of capital expenditure relative to GDP at 3 per cent.