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Ragini: Welcome to the EY India Insights podcast. I am your host, Ragini and in this episode, we try to decode the interim budget for FY25 in order to bring out the key macroeconomic messages. 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, Dr. Srivastava.

Dr. Srivastava: Thank you. Thank you for having me.

Ragini: Let us kick off by getting a perspective on the key takeaways from the vote on account budget. What do you think have been the key economic priorities of the government as evidenced from the interim budget? In particular, are there any growth signals emanating from the budget?

Dr. Srivastava: From a macro-fiscal perspective, it is the balance between fiscal consolidation and support to economic growth which has been the guiding feature of the FY25 budget. From the viewpoint of fiscal consolidation, the budget has given a clear signal that after having been disturbed in the COVID year, when fiscal deficit had slipped to 9.2%, they are able to bring it down incrementally in the FY24 revised estimates to 5.8%, which is an improvement over the budget estimate of 5.9%; then, bring it down further to 5.1% in FY25 and 4.5% in FY26. Clearly, the emphasis on fiscal consolidation will be received very well by the private sector, where investment possibilities are being examined as well as the multinational organizations and other stakeholders who look towards the fiscal sustainability of the Government of India's budget.

The second feature is that in order to support growth, the momentum on capital expenditure growth has been sustained. In the FY24 budget, using the revised estimates for FY24, the realized growth may be close to 28%, and in FY25, when we consider budget estimates over revised estimates, the growth rate in capital expenditure can be nearly 17%.

Further, the central government has continued with the program to support the state governments with their existing scheme of extending 50-year interest-free loans if such loans are to be used for the state government capital expenditure. This scheme has done very well in FY24, and it has been extended with an enhanced amount in FY25 and I expect that this will support growth.

The third feature is that as fiscal deficit is reduced, the center's dependence on market borrowing would go down and this will eventually facilitate a regime where interest rate deduction may be feasible. This will spur private investment. In this sense, the budget has established a robust balance between fiscal consolidation and support for growth.

Ragini: Thank you for your lucid and thoughtful insights. In your assessment, are the tax revenue growth estimates for a FY24 revised estimate (RE) and FY25 budget estimate (BE) realistic?

Dr. Srivastava: In terms of the revised estimates, the growth in direct taxes has been very high at 17.2%. This has been lowered marginally to 13.1% in FY25. Comparatively, the indirect taxes had grown somewhat lower at 7% and this has been enhanced to 9.4%. Together, therefore, gross tax revenues of the central government show a growth of 12.5% in FY24  and 11.5% in  FY25. These growth rates respond to nominal GDP growth and assumed tax buoyancies.

In terms of the realism, the tax buoyancy has been brought down from 1.4 to 1.1, which is somewhat conservative. If the buoyancy improves a little bit, there would be a higher realized tax revenue in FY25. This may be further positively affected by the nominal growth assumptions. The nominal growth that has been assumed is 10.5%, and that appears to be somewhat lower than our expectation of close to 11%.

Given both of these factors may turn out to be somewhat better, we might do better in terms of the assumed gross tax revenues.

Ragini: Thank you for explaining it so vividly. Can we say that India is well on its path to fiscal consolidation? Is the fiscal deficit target of 4.5% of GDP, as was mentioned by the Finance Minister, achievable? Also, when do you think that the Fiscal Responsibility and Budget Management (FRBM) target of 3% would be reached?

Dr. Srivastava: The dynamics of fiscal imbalance are such that when some major macro shock occurs, just as we experienced the COVID shock in FY21 when the Center’s fiscal deficit had shot up to 9.2%, the increase happens in one shot, but the improvement back to normalcy takes several years.

From 9.2% (FY21), we reduced it to 6.7% (FY22), then 6.4% (FY23), then 5.8% (FY24), and now we are planning to bring it down to 5.1% (FY25) and to 4.5% in FY26. This is still well above the FRBM target of 3%. It might take another three years and 50 basis points of reduction per year to reach the level of 3%, as envisaged in the FRBM.

The government has shown a clear commitment towards achieving normalization of the level of fiscal deficit in being consistent with FRBM, but it might take several years. The dynamics are such that the deterioration occurred in one shot, but improvement will happen over at least eight years this time.

Ragini: These are extremely useful perspectives, Dr. Srivastava. Thank you so much for joining us in this session and providing us your invaluable 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. Thank you.

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