India’s Finance Minister Nirmala Sitharaman holds up a folder with the Government of India’s logo as she leaves her office to present the federal budget in the parliament, before the nation’s general election, in New Delhi, India, February 1, 2024.
| Photo Credit: REUTERS

The government under Prime Minister Narendra Modi should focus on adherence to fiscal prudence and continue on the fiscal consolidation path, suggested SBI Research ahead of the much-awaited full Budget for 2024-25 to be tabled on July 23 – the first Budget under Modi 3.0.

What is fiscal deficit?

The difference between total revenue and total expenditure of the government is termed as fiscal deficit. It is an indication of the total borrowings that may be needed by the government.

SBI Research suggested that the Centre should target a fiscal deficit of 4.9%, but it must not obsess too much over the fiscal stance. The Government intends to bring the fiscal deficit below 4.5% of GDP by the financial year 2025-26.

In the Interim Budget earlier this year, the Government has targeted a fiscal deficit of 5.1% of GDP for 2024-25. However, SBI Research believes that the Government may budget a fiscal deficit of less than “5% — may be 4.9% — for 2024-25” due to stellar growth in GST revenues and higher dividends from PSUs and RBI.

State borrowings

As the budgeted fiscal deficit gets lowered, the gross market borrowing of the government will also reduce to around ₹13.5 lakh crore in FY25 compared to ₹14.1 lakh crore in the interim budget and net market borrowing to ₹11.1 lakh crore against ₹11.8 lakh crore earlier, the report, authored and led by Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI, said. “This along with India’s inclusion in Global Bond indices will keep the yield curve movements anchored,” it added.

In 2023-24, the Government pegged the fiscal deficit target for FY2023-24 at 5.9% of gross domestic product (GDP). Later, it was downwardly revised to 5.8%.

The interim budget, tabled on February 1, took care of the financial needs of the intervening period until a government was formed after the Lok Sabha polls, after which a full budget was supposed to be presented by the new government in July.

FM Sitharaman to break record with sixth budget presentation

With this upcoming Budget Presentation,surpassed the record set by former Prime Minister Morarji Desai, who as finance minister, presented five annual budgets and one interim budget between 1959 and 1964.

Mrs. Sitharaman’s upcoming Budget speech would be her sixth.The government on July 6 announced the dates of the Budget session of Parliament which will start on July 22 and conclude on August 12.

As per the data, the economy expanded 8.2% in 2023-24 against a 7% growth in 2022-23. Representational file image.
| Photo Credit: Reuters

India’s economy grew 7.8% in the March quarter, pushing up the annual growth rate to 8.2%, according to official data released on May 31.

Growth in the January-March period was lower than the 8.6% expansion in the December quarter.

The gross domestic product (GDP) had expanded 6.2% in the January-March period of the 2022-23 fiscal year, according to data released by the National Statistical Office (NSO).

As per the data, the economy expanded 8.2% in 2023-24 against a 7% growth in 2022-23.

The NSO in its second advance estimate of national accounts had pegged the country’s growth at 7.7% for 2023-24.

China has registered an economic growth of 5.3%in the first three months of 2024.

 The Reserve Bank’s Annual Report for 2023-24 said that the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment.
| Photo Credit: REUTERS

Indian economy is likely to grow at 7% in the current fiscal year starting April, the Reserve Bank of India (RBI) said in its annual report released on May 30.

The Indian economy, it said, expanded at a robust pace in 2023-24 (April 2023 to March 2024 financial year), with real GDP growth accelerating to 7.6% from 7.0% in the previous year – the third successive year of 7% or above growth.

“The real GDP growth for 2024-25 is projected at 7.0% with risks evenly balanced,” it said.

India’s GDP growth is robust on the back of solid investment demand which is supported by healthy balance sheets of banks and corporates, the government’s focus on capital expenditure and prudent monetary, regulatory and fiscal policies, the RBI said. The Reserve Bank’s Annual Report for 2023-24 said that the Indian economy is navigating the drag from an adverse global macroeconomic and financial environment.

Indian economy, the report said, is well-placed to step up growth trajectory over the next decade in an environment of macroeconomic and financial stability.

“As headline inflation eases towards the target, it will spur consumption demand especially in rural areas,” it said.

It further said the external sector’s strength and buffers in the form of foreign exchange reserves will insulate domestic economic activity from global spillovers.

The report, however, added that geopolitical tensions, geoeconomic fragmentation, global financial market volatility, international commodity price movements and erratic weather developments pose downside risks to the growth outlook and upside risks to the inflation outlook.

The RBI also emphasised that the Indian economy would have to navigate challenges posed by rapid adoption of AI/ML (artificial intelligence/machine learning) technologies as well as recurrent climate shocks.

The annual report is a statutory report of RBI’s central board of directors. The report covers the working and functions of the Reserve Bank of India for the April 2023-March 2024 period.

United Nations:

 Indian economy’s growth rate projection for this year has been raised by 0.7 per cent to 6.9 per cent from the forecast made in January by the UN and it retains its position as the world’s fastest-growing large economy.

The better outlook is fueled by lower inflation, robust exports, and increased foreign investments, Hamid Rashid, the chief of the UN’s Global Economic Monitoring Branch, said on Thursday.

“The drivers (of higher projection) are very simple: inflation has come down significantly, and that means the fiscal position is not as constrained as in other countries,” he said at the release of the mid-year edition of the World Economic Situation and Prospects (WESP) report.

Exports, which is another element in the improved projection, have been “pretty robust” and India is also benefiting from more investments coming in from other Western sources while the flow to China is coming down, Rashid said.

“India has become an alternative investment source or destination for many Western companies,” he added.

Another factor benefiting India, he said, is the special import arrangement India has with Russia for oil that is lowering its cost, he said.

The WESP report also gave a positive picture of the employment situation, saying: “In India, labour market indicators have also improved amid robust growth and higher labour participation.”

It said that the women’s labour force participation has increased particularly in South Asia.

India’s growth projection for next year remains at 6.6 per cent, which was made in January.

Last year, the WESP report said, India’s economy grew by 7.5 per cent and in 2022 by 7.7 per cent when it received a big short-term boost coming out of the drastic Covid slowdown.

The report also revised the projection for the world economy this year to 2.7 per cent, an increase of 0.3 per cent from January.

“Most major economies have managed to bring down inflation without increasing unemployment and triggering a recession,” the report said adding a cautionary note, “However, the outlook is only cautiously optimistic as higher-for-longer interest rates, debt difficulties, and escalating geopolitical risks will continue to challenge stable and sustained economic growth”.

The developing economies on the whole are growing at a faster clip — clocking 4.1 per cent — than the developed economies which are expected to record only a 1.6 per cent growth rate this year.

However, the growth among developing countries is uneven, the WESP report stated.

While large developing economies like India, Indonesia and Mexico are benefiting from strong domestic and external demand, many African, Latin American and Caribbean economies are on a “low-growth trajectory” because of “lingering political instability”, higher borrowing costs and exchange rate fluctuations, it said.

China’s economy is projected to grow by 4.8 per cent this year, making it the second fastest-growing large economy.

The US economy is projected to grow by 2.3 per cent this year.

“Despite the most aggressive monetary tightening in decades, a scenario of hard landing of the United States economy has receded,” the report said.

Looking ahead, the WESP saw risks and opportunities in rapid technology changes.

“The breakneck pace of technological change — including in machine learning and artificial intelligence — presents new opportunities and risks to the global economy, promising to boost productivity and advance knowledge on the one hand, while exacerbating technological divides and reshaping labour markets on the other,” the report said.

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)

The fall in household savings has been at the heart of recent debates in India. The decline in household savings is brought about by a drastic reduction in net financial savings as the household net financial savings to GDP ratio attained a four-decade low. Figure 1 shows the broad trend in household savings, physical savings and gold, and net financial savings.

The sharp reduction in household net financial savings in 2022-23 has been associated with an overall fall in household savings despite marginal recovery in physical savings.

Interpreting lower financial savings

The net financial savings of the household is the difference between its gross financial savings and borrowing. The gross financial savings of a household is the extent to which its financial assets change during a period. The financial assets of households typically comprise bank deposits, currency and financial investments in mutual funds, pension funds, etc. Though household borrowing includes credit from non-bank financial corporations and housing corporations, the bulk of the borrowing comprises credit from commercial banks. In general, there are at least three distinct factors that can potentially bring about a reduction in household net financial savings.

First, households typically finance their additional consumption expenditure by increasing their borrowing or depleting their gross financial savings. By financing higher consumption expenditure at any given level of disposable income, lower net financial savings provide stimulus for aggregate demand and output in this case.

Also read: No small change: on the raising of returns on small savings schemes

Secondly, when households finance higher tangible (physical) investment by increasing their borrowing or depleting their gross financial savings. The reduction in net financial savings in this case stimulates aggregate demand and output through the investment channel.

Third, when interest payment of a household increases say due to higher interest rates, households can meet the increased burden through borrowing or through depleting gross financial savings thereby inducing a reduction in net financial savings.

The first factor hardly played any role in the sharp reduction in gross financial savings in 2022-23 as the consumption to GDP ratio remained largely unchanged between 2021-22 (60.95%) and 2022-23 (60.93%). The second factor played only a limited role. While the gross financial savings to GDP ratio declined by 3 percentage points (7.3% to 5.3%) in 2022-23, household physical investment to GDP ratio increased only by 0.3 percentage point (12.6% to 12.9%) during the same period. Though higher borrowing is partly financed by interest income from financial assets, it can be largely attributed to higher interest payments of the household in the recent period.

Figure 2 reflects this phenomenon by depicting the trend in household borrowing to income ratio, debt to income ratio and the ratio between household physical savings and gross financial savings.

The share of household borrowing in household (disposable) income registered a sharp spike in 2022-23. Such a rise in household liabilities was associated with a decline in the physical savings to financial savings ratio, indicating a change in household asset composition in favour of financial assets.

Implication of higher debt burden

The rise in household debt burden has two concerns for the macroeconomy.

The first concern is about debt repayment and financial fragility. Since the repayment capacity depends on the income flow, a key criterion for evaluating a household’s debt sustainability is the difference between interest rate and the income growth rate. On the flip side, the interest payments from the households are the interest income of the financial sector. If households fail to meet their debt repayment commitments, then it reduces the income of the financial sector and deteriorates their balance sheets, which in turn can have a cascading effect on the macroeconomy if the latter responds by reducing their credit disbursement to the non-financial sector.

Figure 3 shows the difference between the weighted average lending rate of scheduled commercial banks and the growth rate of gross national income.

Though the difference shows a declining trend since 2021-22, the indicator turned out to be negative in the 2023-24 period. The sharp reduction in interest rate and income growth gap is on account of lower income growth rate and higher lending rate of the commercial banks. The weighted average lending rate registered a sharp rise in the last two years, particularly due to the tight monetary policy stance of the RBI and the sharp rise in the call money rate during this period.

The second concern pertains to the implication on consumption demand. Over and above disposable income, the consumption expenditure of the household can be affected by their wealth, debt, and interest rate. Reduction in household wealth can lead to lower consumption expenditure as households may attempt to preserve their wealth position by increasing their savings.

Higher household debt can also reduce consumption expenditure in at least two ways. First, if higher household leverage is perceived as an indicator of higher default risk, then it may induce banks to indulge in credit rationing and reduce the credit disbursement. The consequent reduction in credit disbursement can adversely affect consumption. Second, higher debt can reduce consumption expenditure by increasing the interest burden, not to mention the effect of higher interest rates on consumption expenditure.

The Indian economy registered all these trends in the recent period. The financial wealth or the net worth of the household is the difference between the stock of financial assets and liabilities. As evident from figure 4, the financial wealth to GDP ratio of the household has registered a sharp decline in the recent period, along with a rise in leverage of the household as indicated by the rise in debt to net worth ratio.

Not surprisingly, the growth rate in private final consumption expenditure during 2023-24 registered a sharp decline as compared to 2022-23.

Macroeconomic implication

The implications of the procyclical leverage by the households along with the compositional change in the asset side of the balance sheet, albeit with a fall in the level of savings, for the stability of economic growth is concerning.

First, given that both the flow indicator of liabilities to disposable income and the stock indicator of debt to net worth shows an increasing trend makes the households vulnerable.

Second, the policy mantra of higher interest rate to counter inflation by reducing macroeconomic output and employment can leave households with an increasing level of debt in their balance sheets and potentially push the households into a debt trap. Third, the implications of high interest rate on debt burden can have an adverse impact on the consumption of the households and consequently for aggregate demand.

The household balance sheet trends indicate a broader change in the structure of the economy. The change in composition of the asset side of the household balance sheet towards financial assets indicate some degree of financialisation of the economy which moves from a production-based economy to a monetary or financial exchange-based economy making the five-trillion-dollar economy both jobless and fragile.

Zico Dasgupta and Srinivas Raghavendra teach economics at Azim Premji University.

Moody’s corporate headquarters in New York. File
| Photo Credit:
Reuters

Moody’s Analytics on April 12 projected India’s economy to expand 6.1% in 2024, lower than 7.7% growth clocked in 2023.

It said output in India remains 4% lower than it would have been without the COVID pandemic and its various aftershocks — from supply snags to military conflicts abroad.

“Economies in South and Southeast Asia will see some of the strongest output gains this year, but their performance is flattered by a delayed post-pandemic rebound. We expect India’s GDP to grow 6.1% in 2024 after 7.7% last year,” Moody’s Analytics said.

In its report titled ‘APAC Outlook: Listening Through the Noise’, Moody’s Analytics said the region overall is doing better than other parts of the world. “The APAC (Asia Pacific) economy will grow 3.8% this year, which compares with a growth of 2.5% for the world economy,” it said.

Moody’s Analytics said looking at the GDP relative to its trajectory prior to the pandemic shows that India and Southeast Asia have seen some of the largest output losses worldwide and are only beginning to recover. With regard to inflation, it said the outlook for China and India is more uncertain.

“Inflation in India is at the opposite extreme, with recent consumer price inflation rates hovering around 5%, close to the upper end of the Reserve Bank of India’s target range of 2 to 6% and without clear evidence of a trend towards slowing price pressures,” said the report authored by Stefan Angrick, Senior Economist, and Jeemin Bang, Associate Economist at Moody’s Analytics.

Earlier this month, the Reserve Bank said food price uncertainties continue to weigh on the inflation trajectory going forward, and retained 4.5% retail inflation projection for the current fiscal 2024-25.

“Continuing geopolitical tensions also pose upside risk to commodity prices and supply chains,” RBI said. RBI forecast June quarter inflation at 4.9% and September quarter at 3.8%. For December and March quarters, inflation is projected at 4.6% and 4.7%, respectively.

At end-June 2023, long-term debt (with original maturity of above one year) was placed at $505.5 billion. File
| Photo Credit: K. Pichumani

India’s external debt at end-June 2023 was placed at $629.1 billion, recording an increase of $4.7 billion over its level at end-March 2023 according to data released by the Reserve Bank of India (RBI) on September 28.

The external debt to GDP ratio declined to 18.6% at end-June 2023 from 18.8% at end-March 2023, the RBI said.

Valuation effect due to the appreciation of the U.S. dollar vis-à-vis the major currencies such as yen and SDR2 amounted to $3.1 billion. Excluding the valuation effect, external debt would have increased by $7.8 billion instead of $4.7 billion at end-June 2023 over end-March 2023.

At end-June 2023, long-term debt (with original maturity of above one year) was placed at $505.5 billion, recording an increase of $9.6 billion over its level at end-March 2023.

Balance of Payments

Meanwhile, India’s current account deficit (CAD) narrowed to $9.2 billion (1.1% of GDP) in Q1:2023-24 from $17.9 billion (2.1% of GDP) in Q1:2022-23 but it was higher than $1.3 billion (0.2% of GDP) in the preceding quarter, according to the RBI’s data.

The widening of CAD on a quarter-on-quarter basis was primarily on account of a higher trade deficit coupled with a lower surplus in net services and decline in private transfer receipts.
Net services receipts decreased sequentially, primarily due to a decline in exports of computer, travel and business services, though remained higher on a year-on- year (y-o-y) basis.

Net outgo on the income account, primarily reflecting payments of investment income, declined to $10.6 billion in Q1:2023-24 from $12.6 billion in Q4:2022-23, though higher than a year ago.
In the financial account, net foreign direct investment decreased to $5.1 billion from $13.4 billion a year ago.

International Investment Position

Net claims of non-residents on India increased by $12.1 billion during Q1:2023-24 and stood at $379.7 billion as at end-June 2023.

The rise in net claims of non-residents during the quarter was on account of higher rise in foreign-owned financial assets in India ($36.2 billion) when compared with Indian residents’ overseas financial assets ($24.1 billion) according to data released by the RBI.

Increase in reserve assets ($16.6 billion) was the largest contributor to the rise in Indian residents’ foreign assets during April-June 2023, followed by direct investment, loans and trade credit.

Inward portfolio investment ($15.0 billion) and foreign direct investment ($8.9 billion) together accounted for two thirds of the rise in foreign liabilities of Indian residents.

New Delhi:

The Indian economy grew 7.8 per cent in the April-June quarter, driven by high private consumption and investment, the fastest in a year that saw a sharp rise in inflation.

It marks a rise from a 6.1 per cent GDP growth in January-March quarter of the previous financial year. However, it fell short of the Reserve Bank of India’s 8 per cent forecast.

The year-ago period, April-June quarter of 2022-23, saw a 13.1 per cent growth. The GDP growth in October-December was 4.5 per cent.

With China’s logging 6.3 per cent growth in the first quarter, India remains the fastest-growing major economy.

The agriculture sector grew 3.5 per cent in the first quarter, up from 2.4 per cent in the year-ago period. In the manufacturing sector, growth dipped from 6.1 per cent to 4.7 per cent.

The growth figures for the ongoing July-September quarter will be released on November 30.

Days earlier, the government shared a graph of annual GDP growth rate of top economies in 2023, which showed India at the top spot. “India’s economy stands tall among the top 10,” the government said.

The graph showed India’s GDP growth as 5.9 per cent following by China with 5.2 per cent and US with 1.6 per cent.

Small States must prioritise raising their own revenue to reduce their dependency on the Union government

The fiscal situation of India’s States has garnered significant attention in recent times. Despite ample data on State finances, most of the analysis is centred around larger States. There needs to be more discussion on the fiscal position of small States (i.e. States with a population of less than 1 crore). Most of these small States have distinctive characteristics that limit revenue mobilisation. Recognising these disabilities, the Constitution has provided mechanisms to address them. But these States continue to rely heavily on the Union government for revenue. This dependence creates vulnerabilities for the States as well as the Union.

The total revenue receipts for a State constitute transfers from the Union government such as the State’s share in Union taxes including income tax, corporation tax, and grants, and the State’s own revenues from tax and non-tax sources. The State can raise its own taxes (own tax revenue or OTR) from professions, property, commodities, etc. It can mobilise non-tax revenue (own non-tax revenue or ONTR) from social and economic services, profits, dividends, etc.

The revenue receipts of each of the small States have increased. For six of the nine States, they have grown faster than the gross state domestic product (GSDP). But these increases are primarily due to Union transfers rather than States’ own revenues. In other words, dependence on the Union has not decreased. For three States — Mizoram, Sikkim and Tripura — the revenue receipts have grown slower than the State GSDP implying limited fiscal space to operate.

While the share of Union transfers in the revenue receipts of all States combined hovers between 40% and 50%, the ratio is quite large for the small States. Except for Goa, the Union’s share in all the other small States’ revenue receipts is more than 60% (2022-23 Budget Estimates). For five States, the share is around 90% (Chart 1).

Chart 1 | The chart shows the current transfers to the revenue receipts ratio. The figures are in %.

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The States’ economies have grown over time, but this has not necessarily translated into higher revenue mobilisation capacities. It is best reflected in the continued dominance (2014-2023) of current transfers in the revenue receipts.

The capacity of small States to raise their own taxes continues to be limited. Eight out of nine States fare worse than the all-State average OTR-GSDP ratio (Chart 2).

Chart 2 | The chart shows the own tax revenue (OTR) to gross state domestic product (GSDP). The figures are in %.

The distinctive characteristics of these States restrict economic activity and consequently make it challenging to generate tax revenue. However, what is particularly concerning is that the States’ ability to mobilise taxes has yet to show significant improvement over time. At best, it has fluctuated, with several States experiencing a peak in their OTR-GSDP ratio around 2017-18. The small States do relatively better in mobilising their ONTR, with six States performing better than the all-State average. However, States such as Manipur, Tripura, and Nagaland have consistently struggled in terms of their ONTR-GSDP ratio, performing poorly in comparison.

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The limited capacity of small States to generate their own revenues results in a heavy dependence on the Union government, exposing the States to various vulnerabilities. First, the States rely on the Union governments’ political goodwill. A sudden decline in Union transfers can adversely affect the States’ expenditures. In the last few years, there have been increasing disagreements concerning resource sharing (for example, GST compensation) between the Union and the States. Second, high dependence on the Union might imply less fiscal freedom for the States. A significant portion of the funds transferred by the Union is tied to specific purposes, limiting the States’ flexibility. In some instances, given their existing revenue situation, the States might be unable to match the transfers. Third, the lack of their own revenues can lead to weakened State capacity, affecting the delivery of social, economic, and general services. This situation becomes even more critical as many small States share international borders. The developmental concerns in these States can have implications for national security.

To mitigate these vulnerabilities, the States must prioritise identifying new sources of tax revenue or explore ways to leverage existing ones more effectively. A study by Manipur University evaluating the State finances of Manipur identified how its liquor prohibition policies have led to substantial revenue losses without significantly reducing the negative consequences of drinking. Another study of Arunachal Pradesh’s finances identified the potential to generate more revenue from transactions on land and sales tax.

Additionally, there is a need to improve the tax administration in the States. Not only will this lead to higher resource mobilisation, but it will also reduce the deviation of actual from budgeted tax revenues. The States can boost their collection of non-tax revenues by revising the existing charges and rates for various services and enhancing administrative revenue collection efficiency. Many state public sector enterprises in these States are not in good shape and do not contribute enough revenue. The States must consider revitalising and corporatising these enterprises to improve their revenue performance. Some States such as Mizoram have closed down loss-making public sector enterprises, recognising that these entities are a liability.

Sarthak Pradhan is an Assistant Professor at the Takshashila Institution. The research for this article was made possible by The International Centre Goa Research Grants. Email ID: sarthak@takshashila.org.in

Source: “State Finances: A Study of Budgets”, Reserve Bank of India

Also read: Data | Friction over revenue sharing formula: Why some States get more money from Centre

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