Reducing India's Debt-to-GDP Ratio for Growth

The Indian government's budget for the fiscal year 2024-25 underscores its dedication to fiscal consolidation, with a strategy centred on balancing expenditures and managing deficits. The fiscal deficit target for FY25 has been set at 4.9 percent of the gross domestic product (GDP), improving from the 5.1 percent target proposed in the interim budget. This progress has been facilitated by higher-than-expected dividends from the Reserve Bank of India, enabling the government to boost spending in crucial sectors while still adhering to fiscal consolidation.

Future Fiscal Targets and Legislative Adjustments

Looking forward, the government has set an ambitious fiscal deficit target of 4.5 percent for FY26, assuming geopolitical risks remain stable. Beyond FY26, the emphasis will shift to reducing the India debt-to-GDP ratio. To support this objective, the government plans to amend the Fiscal Responsibility and Budget Management (FRBM) Act to establish a new fiscal framework, signalling a significant shift from targeting a specific deficit number to focusing on debt reduction.

Key Changes from Interim to Full-Year Budget

The full budget maintains the capital expenditure target at Rs 11.11 lakh crore but includes some reallocations. The budget has increased the allocation for interest-free loans to states from Rs 1.3 lakh crore in the interim budget to Rs 1.5 lakh crore. However, this increase is contingent upon state governments collaborating with the central government on implementing new generation reforms.

Despite the challenging environment, the government has managed to limit the rise in revenue expenditure to approximately Rs 55,000 crore compared to the interim budget. This additional expenditure will support various initiatives, including housing projects, employment-linked schemes, and financial assistance to states such as Bihar and Andhra Pradesh. The allocations for food, fertilizer, and fuel subsidies remain unchanged, while the expenditure on interest payments has been reduced.

Tax Revenue Adjustments and Projections

Gross tax revenues have seen a slight increase of 0.2 percent over interim estimates. This increase, driven by higher capital gains tax, has been offset by income tax relief, reduced taxes on foreign companies, and several customs duty cuts, including those on gold and silver. As a result, net tax revenue to the Centre is lower by Rs 18,000 crore, while the states' share in taxes has risen by Rs 27,428 crore, or 2.2 percent. The states' share now stands at 32.5 percent of gross tax revenues, which is below the Fifteenth Finance Commission’s recommendation of 41 percent. The remainder of tax revenues is allocated to cesses and surcharges that are not shared with the states.

Revenue and Expenditure Outlook

The finance minister has projected a net tax revenue of Rs 25.84 lakh crore for FY25, representing an 11 percent increase from the provisional figures for FY24. Direct tax revenues are expected to grow by 12.8 percent, following a 17.9 percent increase last year driven by a 25 percent rise in income taxes. Corporate tax is projected to grow by 12 percent, though this estimate has been revised downward due to declining profits in the first quarter of FY25. If this trend continues, corporate tax collections might fall short of expectations. While overall tax revenue projections appear achievable, there may be deviations due to fluctuations in commodity prices.

Budget Size and Quality of Expenditure

The budget size, expressed as a ratio of total expenditure to GDP, is gradually compressing, projected at 15 percent for FY25. The quality of expenditure has improved, with capital expenditure rising to 3.4 percent of GDP from 2.5 percent in 2021-22. The share of revenue expenditure has correspondingly declined. For FY25, capital expenditure is projected to increase by 17 percent, while revenue expenditure is expected to rise by 6.2 percent. However, capital expenditure utilization may face challenges due to muted spending in the early months of the year due to elections.

Strategic Shift: From Deficit Management to Debt Reduction

The budget signals a shift in the fiscal framework starting from FY26. The finance minister has emphasized a focus on reducing the India debt to GDP ratio, rather than targeting a specific fiscal deficit figure. This shift aims to address concerns from rating agencies regarding India’s high debt levels, which have impacted the country’s sovereign rating. Articulating a clear path to reduce the India debt to GDP ratio through amendments to the FRBM Act will be crucial. Additionally, managing states' debt will also be an important factor in achieving this goal.

In conclusion, the 2024-25 budget reflects a strategic approach to fiscal management, balancing increased expenditure in critical areas with a commitment to reducing the fiscal deficit and managing debt. The adjustments in tax revenues, expenditure plans, and borrowing strategies are designed to support sustainable economic growth and fiscal stability, setting a clear path for India's economic.