Will there be surprise announcements in the Interim Budget?

The Finance Minister is ordinarily not expected to announce big expenditures or new economic plans in interim budgets, but will there be some surprises this time around?

A month ago, Nirmala Sitharaman had said there will be no spectacular announcements on Feb 1 when she will present the Interim Budget for 2024-25.

"I am not going to play spoilsport, but it is a matter of fact that the February 1, 2024, Budget that will be announced will just be a vote-on-account because we will be in an election mode. So, the Budget that the government presents will just be to meet the expenditure of the government till a new government is sworn in," she said.

But is that a rule?

As per convention, the outgoing government presents an Interim Budget or vote-on-account in an election year, and Parliament approves expenditures for three to four months till the new government presents its full Budget. As per current rules, the government cannot provide for new services in the vote on account.

According to a 1975 government decision, a vote on account cannot be used for new services since it only enables the government to continue incurring expenditures until the full Budget is approved.

The Budget Manual defines a new service as an expenditure for a new policy decision, including a new activity or a new form of investment, that was not brought to Parliament's attention earlier.

But in 2019, Piyush Goyal, who was holding charge as the Finance Minister, announced a ₹6,000 per year cash transfer to farmers. He had also announced some income tax sops, raising the standard deduction.

Piyush Goyal was able to announce the cash transfers by including them in the supplementary demands for grants. Once they were part of supplementary grants, they became part of the revised estimate and were no longer a new service.

Economists say that while Sitharaman will stick to what she said that the budget will not be spectacular, revised revenue expenditure numbers could go up ahead of the elections.

FISCAL FITNESS

It is most likely that the overall Budget math will tally with the estimates made for 2023-24. Deviations will be minor as the government is keen on bringing the fiscal deficit to 4.5 percent of GDP by 2025-26.

This is in line with the glide path announced by the government after it had to sharply raise the fiscal deficit to 9.5 percent of GDP for 2020-21 during COVID-19.

The government has set a target of 5.9 percent fiscal deficit for 2023-24, down from 6.4 percent in 2022-23. It is most likely that the government will keep to this number in its revised estimate for fiscal deficit.

This is largely due to robust direct tax collections. These may top the budget estimates. Corporate tax collections will likely exceed targets as lower commodity prices have boosted profit margins. Moreover, companies reported healthy numbers. Better compliance has boosted personal income tax collections.

The indirect tax collections may be lower than the budget estimates due to a shortfall in customs and excise collections, but overall, tax collections may exceed the projections made in the 2023-24 budget.

Lower-than-expected crude oil prices have resulted in lower windfall taxes and petroleum duty collections.

High dividends from the Reserve Bank of India and public-sector companies could keep non-tax revenues buoyant, although the government's disinvestment program has continued to disappoint this year.

On the expenditure side, the government may exceed its revenue expenditure numbers. The 2023-24 budget may likely have underestimated the revenue expenditure. It had projected that the annual number would only grow by 1.4 percent in the current fiscal year.

The government contended that if there was demand, the government could always increase spending under several welfare schemes, including the rural employment scheme, MNREGS.

The government has sought Parliament's permission for additional spending under the first supplementary demand for grants in December. It has asked various ministries to submit requests for a second supplementary demand for grants (which will be part of the Interim Budget).

Monies will likely be spent on subsidies, including food and fertilizer.

The government has already announced an extension of the free food grain program for the next five years.

It remains to be seen if the government announces cuts in fuel prices ahead of elections and if fuel subsidies will rise even more after the government has cut the LPG prices and expanded the Ujjwala scheme.

The government will make its numbers broadly match. Additional expenditures are being met through revenue buoyancy.

As always, there will be savings as some of the committed expenditures may not materialize. The government will likely stick to its fiscal deficit target of 5.9 percent of GDP.

GLIDE PATH

The government will likely project a fiscal deficit of 5.3-5.4 percent of GDP for 2024-25. Unless there is a surprise outcome in the general election, the full budget to be presented in June-July will likely stick to that number.

If the incumbent Bharatiya Janata Party loses the elections, the new government may have different ideas about the fiscal glide path of 4.5 percent of GDP by 2025-26.

The financial markets may not be too perturbed by the fiscal math and borrowing numbers that may emerge.

The government is expected to borrow amounts similar to the 2023-24 number. The budget estimate for 2023-24 borrowing is ₹15.4 trillion.

The market will find it easier to absorb this quantum of borrowing as the Reserve Bank of India and the US Federal Reserve are expected to start cutting interest rates in 2024.

Moreover, India's inclusion in the global bond indices could attract upwards of $25 billion- $ 30 billion in investments in Indian government bonds in the next 18-24 months.

The Indian economy is expected to grow 7.3 percent in real terms in 2023-24, which translates to a nominal growth of 8.9 percent. The budget had estimated a nominal growth of 10.5 percent.

Thanks to slightly higher wholesale price inflation in 2024-25, the nominal growth, if one goes with RBI Governor Shaktikanta Das's estimate of 7 percent, the nominal GDP growth in 2024-25 will be higher, boosting the prospects for tax collections.

Expectations are less from Finance Minister Sitharaman regarding the interim budget. Surprises, if any, will be taken by the market in its stride.