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Ragini: Welcome to the EY India Insights podcast. I am your host Ragini Trehan and in this episode, we try to understand the macroeconomic considerations of the Government of India for the forthcoming interim budget for 2024-2025. To facilitate this discussion, we are joined by Dr. D.K. Srivastava, a distinguished economist, honorary professor, Madras School of Economics and EY India's Chief Policy Advisor. A very warm welcome, sir.

Dr. Srivastava: Thank you for having me here.

Ragini: Let us kick off by getting a perspective on India's GDP growth outlook for the current and the next year. Dr. Srivastava, what may be the underlying growth assumed in the FY25 interim budget, given that the first advance estimates of GDP have shown a robust growth of 7.3% for FY24?

Dr. Srivastava: Well, what is material for the budget is nominal GDP growth because it is by using the nominal GDP growth in conjunction with tax buoyancy that we get an idea of the tax revenue growth. Similarly, we have to look at the fiscal deficit magnitude. We normally relate it to the nominal GDP. So, because fiscal deficit is in nominal terms, GDP also being in nominal terms, we get a ratio which would be the fiscal deficit target that would be characterizing the budget for FY24 or FY25 and so on. Now, the difference between the real and the nominal GDP growth is implicit price deflator (IPD) based inflation.

In FY24, the IPD based inflation is only 1.4%. That is why the difference between the real GDP growth of 7.3% and the estimated nominal GDP growth of 8.9% is very limited. This nominal GDP is equivalent to INR297 lakh crore, that would translate to US$3.6 trillion. Now this will have implications for the FY24 revised estimates, but what is also of interest is what would be our nominal GDP growth estimate for FY25.

Now, assuming 7% real growth and IPD-based inflation of 3% to 3.5%, which would be close to its normal level, we can consider that the budget may assume in nominal GDP growth in the range of 10% to 10.5% for FY25. The real growth would be in the range of 6-6.5% to 7% and the nominal growth would be in the range of 10% to 10.5%.

Ragini: Thank you for your lucid and thoughtful insights on this. My next question is regarding the fiscal deficit target for FY24 being 5.9% of GDP. Do you think this will be met, given the current revenue trends? And further, what is likely to be the fiscal deficit target for FY25 budget estimate (BE)? When do you think the Fiscal Responsibility and Budget Management (FRBM) target of 3% would be finally achieved?

Dr. Srivastava: Given the growth of Center's gross tax revenues at 14.7% during the first eight months of FY24, we expect that the budgeted magnitude of its gross tax revenue would be realized. We also do not expect any major slippage on account of non-tax revenues. Tax and non-tax revenues taken together might exceed the overall budget estimate of revenue receipts, which would be just enough to meet any additional expenditure compared to the budget estimates and to neutralize any shortfall in the disinvestment receipts.

As such, we expect that the budgeted fiscal deficit target for FY24 is likely to be met. And if there is any slippage, it would be only be marginal. Now this budgeted amount would be about INR17.87 lakh crore for FY24. If this magnitude of fiscal deficit is maintained in FY25, with a projected nominal GDP of INR328 lakh crore, which is consistent with a 10.5% nominal growth, this would imply a fiscal deficit-to-GDP ratio of about 5.5%. However, we need to do better than this if we have to really achieve the FRBM target eventually of reaching the level of 3% of GDP. The expectation is that the fiscal consolidation path would be spelled out in this budget, and it would at least target a fiscal deficit ratio of 5.2% for FY25.

The level of fiscal deficit will have to fall in absolute terms to about INR17 lakh crore to reach this target.

You also asked when we would reach the level of 3%? This is important because many multilateral organizations are indicating various risk factors associated with India's fiscal aggregates. For example, the International Monetary Fund (IMF) recently raised an issue that if a fiscal shock occurs one more time, then India may even cross the level of 100% in terms of debt to GDP ratio.

So, it is important for the budget to spell out the clear glide path to reach the level of 3% of GDP. If present revenue growth trends and revenue growth trends are maintained, it might take another four years or so to reach the level of 3%, provided the Indian economy does not experience any additional economic or fiscal shock.

Ragini: Thank you for explaining it so vividly, sir. My last question to you is, given that this is an interim budget in the nature of vote-on-account, do you expect any major policy announcements to be made during the budget or just before it?

Dr. Srivastava: It has been a convention that any major policy announcements are not made in the interim budget, which would be close to the time of general elections. So, I do not expect any major policy announcements to be made in the budget. Some broad policy announcements without any budgeted expenditure to back them may yet be made, and that announcement can be in the budget or even before it. Also, it is possible some tweaking in the tax rates might occur. This might particularly be relevant for the personal income tax schedules and exemption limits, and whatever may be done on account of this would be extremely limited in its scope in terms of its revenue expenditures.

Revenue or revenue receipts are expenditure commitments. We expect that the prioritization of government capital expenditure will be continued because it has so far served well in supporting growth and we need to support growth through the budgetary interventions in the next one to two years, as long as the global crisis continues. This is so because our contribution of net exports is likely to remain negative and it will mostly be the domestic growth drivers that would drive and support growth.

As far as consumption growth is concerned, you would realize, based on the first advanced estimates, that both private and government consumption expenditure growth has been limited and was close to 4% in FY24. This would mean that the central government would need to continue to support growth through infrastructure expansion that would require prioritizing capital expenditures, as far as the global challenges continue. As global conditions normalize and our private sector investment starts to pick up, I think that the government may ease off on prioritizing capital expenditures and give and pay more attention to reaching the fiscal consolidation targets.

Ragini: These are extremely useful perspectives, sir. Thank you very much, Dr. Srivastava, for joining us in this session and providing us with your valuable insights. Thank you to all our listeners. Stay tuned for more captivating discussions on EY India Insights. Do not forget to subscribe to the latest updates. Until next time, this is Ragini Trehan, signing off.

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