There's a knot in Sitharaman's interim budget purse strings
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Budget 2024: The BJP-led NDA government at the Centre, however, may not let the opportunity a pre-election budget presents go waste. In the Interim Budget 2019, then finance minister Piyush Goyal had made a spectacular announcement which many believed had considerably helped the BJP's prospects in the 2019 Lok Sabha elections
AgenciesUnion Budget 2024: Speaking at an event by industry chamber CII a month ago, Finance Minister Nirmala Sitharaman casually remarked that the upcoming Interim Budget might not have any "spectacular" announcements. If you also consider the BJP's recent victories in three big states which are seen to have placed the party on a strong footing for the Lok Sabha elections in May, you can assume that the Interim Budget, to be presented on February 1, will be shorn of any grand populist schemes that require hefty financial support.
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The BJP-led NDA government at the Centre, however, may not let the opportunity a pre-election budget presents go waste. In the Interim Budget 2019, then finance minister Piyush Goyal had made a spectacular announcement which many believed had considerably helped the BJP's prospects in the 2019 Lok Sabha elections. Goyal launched Pradhan Mantri Kisan Samman Nidhi (PM-KISAN) to provide assured income support to small and marginal farmers. Under the scheme, vulnerable landholding farmer families, having cultivable land upto two hectares, were provided direct income support at the rate of Rs. 6,000 per year. This income support was to be transferred directly into the bank accounts of beneficiary farmers, in three equal instalments of Rs. 2,000 each.
The scheme, which entailed an annual expenditure of Rs.75,000 crore, was made effective restrospectively from December 2018 and the first installment for the period upto March 31, 2019 was paid during the financial year.
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A similar scheme in the upcoming budget can't be ruled out, especially given the depressed rural consumption which such a scheme can boost. However, Sitharaman's decision to loosen the purse strings will also have to factor in the inflation, especially food inflation, which has stabilised but remains a concern. The government will have to watch the inflationary effect of mega populist schemes while also considering the need for boosting rural consumption.
The inflation scenario India's retail inflation likely edged up in December on higher food prices but stayed within the Reserve Bank of India's target range for a fourth consecutive month, according to a Reuters poll of economists. Food prices, which account for about half of the inflation basket, rose in November and remained elevated last month, largely led by vegetable prices and household staples. Inflation rose to 5.87% in December from 5.55% in November, according to the median view from the Jan. 5-9 Reuters poll of 56 economists.
"Food inflation continues to drive headline inflation higher ... pulses, spices and vegetables have been firing up inflation and now even fruit prices are joining the fray," said Kunal Kundu, India economist at Societe Generale.
More money in the hands of consumers through welfare schemes in the Interim Budget can have a bearing on inflation. The government has been making an all-out effort to control prices by selling onions and foodgrains at low prices from its own stores under the Bharat brand. It can't afford an upsurge in inlfation right before the elections.
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A consumption boost Consumer goods companies and analysts have said demand for daily groceries, and personal and home products in villages continued to trail urban growth in the December quarter. Since a year ago, there has been a noticeable drop in rural volume due to inflation and erratic monsoons. FMCG volume growth for the September quarter was 7.2% year-on-year. Rural FMCG sales expansion was about 6% year-on-year in the June-September quarter, while the urban sales volume grew by 8%, according to Kantar.
The wages of people at the bottom end of pyramid are not growing at the same pace as the people in organised sector or people in upper end. Sitharaman can take measures in the Interim Budget to boost consumption in rural areas by announcing schemes that put cash in the hands of people at the bottom of the consumption pyramid. However, with inflation still a concern, more so with the coming Lok Sabha elections where food prices can play an important role, the government will be watchful of any inflationary effects of populist schemes. Mega welfare spending similar to the PM-KISAN scheme ;announced in 2019 Interim Budget, may not find a place in the upcoming Interim Budget.
Whither fiscal deficit? India’s fiscal deficit is likely to breach the government’s target of 5.9% in FY24 owing to higher revenue expenditure and lower than budgeted nominal GDP, ratings agency India Ratings and Research said. It noted that although higher tax and non-tax revenue collections may offset the shortfall in divestment earnings, a likely second supplementary demand for grants will upset fiscal calculations, pushing the deficit to 6% of GDP.
“Higher-than-budgeted revenue expenditure triggered through the first and likely second supplementary demand for grants in combination with lower-than-budgeted nominal GDP will push the fiscal deficit to 6% of GDP, 10bp higher than budgeted 5.9%,” said Ind-Ra researchers. The government recently brought in one supplementary demand for grant of Rs 58,380 crore to cover higher spending on fertiliser subsidy and Mahatma Gandhi National Rural Employment Guarantee Programme.
Ind-Ra notes that there is likely to be another supplementary grant, pushing the revenue expenditure to Rs 37.1 lakh crore from Rs 35 lakh crore expected earlier. While the government has budgeted a nominal GDP growth of 10.5% in FY24, the actual growth is expected to be lower, according to experts.
With concerns over fiscal deficit, inflation and low rural consumption, Sitharaman's pre-election budget will be a tight-rope walk.
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