Fiscal Consolidation back on track or govt to continue with capex thrust? A look into the history of Government Budget

Since gaining independence in 1947, India has experienced significant economic transformations, heavily influenced by its government budgeting and fiscal policies. Over the decades, fiscal policies have evolved to address the nation’s changing economic needs, from post-independence reconstruction to liberalization and modern economic growth.

1947-1950: Post-Independence Era

• Initial Budget: The first budget of independent India was presented by R.K. Shanmukham Chetty on November 26, 1947. It focused on post-war reconstruction and dealing with the economic aftermath of partition.
• 1949: John Mathai, as Finance Minister, presented the budget that set the stage for planned economic development. This period saw the establishment of the Planning Commission in 1950.

1951-1965: Planned Economy and Five-Year Plans

• First Five-Year Plan (1951-1956): Focused on agriculture and irrigation to combat food shortages. The fiscal policy was aimed at stabilizing the economy and rebuilding infrastructure.
• Second Five-Year Plan (1956-1961): Shifted focus to heavy industries, with significant state intervention in the economy, led by Finance Minister T.T. Krishnamachari. This period saw increased government expenditure to build industrial capacity.

1966-1980: Green Revolution and Fiscal Strain

• Green Revolution (1966 onwards): Addressed food security with investments in agriculture. Fiscal policies supported high-yield variety seeds, fertilizers, and irrigation.
• 1970s Economic Challenges: The 1970s brought fiscal strain due to oil shocks and droughts. The government, led by Finance Ministers like Yashwantrao Chavan, increased public expenditure to mitigate these crises.

1981-1991: Fiscal Expansion and Crisis

• Economic Expansion: The 1980s saw increased fiscal deficits as the government, under Finance Ministers like Pranab Mukherjee and V.P. Singh, pursued expansionary policies to stimulate growth.
• 1991 Balance of Payments Crisis: High fiscal deficits and a severe balance of payments crisis led to a critical turning point. This crisis set the stage for significant economic reforms and a shift in fiscal policy.

1991-2000: Liberalization and Fiscal Reforms

• Economic Reforms (1991): Under Finance Minister Manmohan Singh, India embarked on liberalization, reducing fiscal deficits through privatization and tax reforms.
• Fiscal Responsibility: The 1994 Chelliah Committee recommended tax reforms leading to a more robust tax base. The introduction of VAT in the late 1990s was a significant fiscal policy shift.

2000-2010: Fiscal Responsibility and Inclusive Growth

• FRBM Act (2003): The Fiscal Responsibility and Budget Management (FRBM) Act aimed to reduce fiscal deficits and ensure fiscal discipline. Finance Minister Jaswant Singh spearheaded this effort.
• Inclusive Growth: Budgets in this period, under Finance Ministers like P. Chidambaram, focused on social sector spending, aiming to balance fiscal discipline with inclusive growth.

2011-Present: Modern Fiscal Policy

1. Fiscal Consolidation and Policy Adjustments
   – Focus on Fiscal Discipline: The government continued efforts to maintain fiscal discipline while promoting growth. Various measures were implemented to streamline subsidies and improve revenue collection.
2. Goods and Services Tax (GST) Implementation (2017)
   – Landmark Reform: GST replaced a plethora of indirect taxes with a unified tax structure, simplifying the tax system and improving compliance. This reform, led by Finance Minister Arun Jaitley, was aimed at boosting tax revenues and creating a common national market.
3. Insolvency and Bankruptcy Code (IBC) (2016)
   – Strengthening Financial Discipline: The IBC was introduced to resolve insolvencies efficiently and improve the credit culture in India. This reform aimed to expedite the resolution of non-performing assets (NPAs) in the banking sector.
4. Fiscal Stimulus and Pandemic Response (2020)
   – Economic Packages: In response to the COVID-19 pandemic, Finance Minister Nirmala Sitharaman announced significant fiscal stimulus packages under the Atmanirbhar Bharat Abhiyan. These measures aimed to support vulnerable sections, boost healthcare, and revive economic growth.
5. Expansion of Social Welfare Programs
   – Pradhan Mantri Garib Kalyan Yojana (PMGKY): Launched during the pandemic to provide direct cash transfers, food security, and other benefits to the poor and marginalized.
   – Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA): Increased funding to provide employment opportunities in rural areas during the pandemic.
6. Infrastructure Push
   – National Infrastructure Pipeline (NIP): Launched to enhance infrastructure development across sectors such as transport, energy, and digital infrastructure, aiming to attract investment and boost economic growth.
7. Focus on Digitalization and Financial Inclusion
   – Digital India Initiative: Promoted the use of technology in governance, financial transactions, and service delivery, enhancing transparency and efficiency.
   – Jan Dhan-Aadhaar-Mobile (JAM) Trinity: Enabled direct benefit transfers (DBT) to ensure subsidies and benefits reach the intended beneficiaries without leakages.
8. Budget Reforms
   – Union Budget Presentation Date Change (2017): Moved from the end of February to the beginning, allowing the government to start implementing budget proposals from the beginning of the fiscal year.
   – Merger of Railway Budget with Union Budget: Streamlined the budgeting process and enhanced the integration of transport infrastructure planning.

India Budget FY2025

Fiscal consolidation is a critical component for any economy aiming for sustainable growth and stability. In the context of India, the fiscal policy was in the right consolidation mode until covid happened and there was a need to social expenditure. Now this budget will decide the forward path to consolidation of excess infra push..

Take a look at the key macro metrics

Key Fiscal Metrics and Trends

1. Gross Fiscal Deficit (GFD)
   – FY2024 Performance: The Gross Fiscal Deficit (GFD) as a percentage of GDP was consolidated to 5.6%, better than the revised estimate (RE) of 5.8%.
   – FY2025 Projections: With a higher-than-expected surplus transfer, FY2025 GFD/GDP is projected at 5%, marginally lower than the budget estimate (BE) of 5.1%.
2. Revenue and Expenditure Trends
   – Revenue Receipts: For FY2024, gross tax revenue was Rs 34.6 trillion, driven by higher collections in customs and personal income tax.
   – Expenditure Management: Revenue expenditure was Rs 34.9 trillion, which was lower than the revised estimates by Rs 460 billion. The capital expenditure target was met at Rs 9.5 trillion.
3. April 2024 Fiscal Performance
   – Fiscal deficit for April 2024 stood at 12.5% of FY2025BE, reflecting a significant increase in expenditure and higher tax revenues.

Fiscal Consolidation Strategies

1. Non-Tax Revenue Enhancement
   – The center’s fiscal consolidation efforts have been significantly driven by higher non-tax revenues, which were Rs 4 trillion, surpassing FY2024RE.
2. Expenditure Control
   – Lower revenue expenditure across multiple ministries has been a strategic move to manage the fiscal deficit effectively.
3. Capital Expenditure Focus
   – Continued emphasis on capital expenditure, especially in infrastructure projects like roads, railways, and defense, to support long-term economic growth.

Implications for the Bond Market

1. Favorable Domestic Cues
   – Recent announcements of government security (G-Sec) buybacks and lower T-bill issuances are expected to improve domestic market sentiment.
   – A comfortable fiscal position and surplus cash balances could allow for further buybacks and reduced net G-Sec supply.
2. Liquidity Conditions
   – Government spending, seasonal payback, and foreign exchange interventions are likely to improve liquidity from Q2FY24 onwards.

Future Projections and Economic Indicators

1. Real and Nominal GDP Growth
   – Real GDP growth is projected at 6.9% for FY2025, down from 8.2% in FY2024.
   – Nominal GDP growth is expected to be 11.3% in FY2025, reflecting stable economic expansion.
2. Inflation and Monetary Policy
   – Average CPI inflation is projected to decrease to 4.5% in FY2025 from 5.4% in FY2024.
   – The repo rate is expected to be adjusted to 6.0% by the end of FY2025, reflecting a slightly accommodative monetary stance.
3. External Sector Dynamics
   – The current account balance is projected to be -1.1% of GDP in FY2025, indicating a manageable external deficit.
   – Brent crude oil prices are expected to average USD 85 per barrel in FY2025.

Challenges and Risks

1. Global Economic Conditions
   – External risks from global economic conditions, including fluctuations in global yields and commodity prices, pose challenges to India’s fiscal consolidation efforts.
2. Domestic Policy Adjustments
   – The government may need to balance between continuing its capex thrust and managing fiscal deficits effectively.