Four questions that explain how to read today's Budget

The fact that the Budget is being presented a couple of months before the general elections makes it an extremely important political exercise

Finance Minister Nirmala Sitharaman will present the last Budget of the second Narendra Modi government today. While technicality – this is just a vote on account – suggests that this Budget is not very important, the fact that it is being presented a couple of months before the general elections makes it an extremely important political exercise. Given this backdrop how should one read today's Interim Budget? Here are four questions which can put this debate in perspective.

Union Finance Minister Nirmala Sitharaman with Ministers of State Pankaj Chaudhary and Bhagwat Karad a day before presentation of the Interim Budget 2024. (PTI)

Four questions that explain how to read today’s Budget

• 
  Will there be a big political announcement in the Budget?

  This is the most important question as far as this Interim Budget is concerned. Will there be a big bang announcement ahead of the 2024 general elections? If the 2019-20 Interim Budget of the first Narendra Modi government is any indication, there is good reason to expect that such an announcement could be made in the 2024-25 interim budget as well. The 2019-20 Interim Budget surprised everyone by announcing direct income support for farmers of ₹6,000 per year with retrospective effect. The programme “Pradhan Mantri Kisan Samman Nidhi (PM-KISAN)” was made effective from December 2018 itself and the government allocated ₹75,000 crore for 2019-20 and ₹20,000 crore in the Revised Estimates of 2018-19. How big was the PM-KISAN announcement? The best way to look at it is to compare the size of its allocation with other major announcements in the 2019-20 Interim Budget. Will the 2024-25 Interim Budget also make a similar commitment in terms of a new scheme or enhanced allocations for existing schemes? It remains to be seen.
• 
  Will the Budget assume a higher tax buoyancy?

  This is the other important question from the resource mobilisation perspective. Most independent experts are almost unanimous that tax collections for fiscal year 2023-24 are likely to exceed the Budget Estimates of the previous budget due to a better-than-expected performance in terms of receipts from direct taxes. This is an impressive feat given the fact that nominal GDP growth in 2023-24 is projected to be 8.9%, which is lower than the 10.5% number assumed in the previous budget. This should also lead to a higher tax buoyancy – it is the ratio of growth in taxes and GDP – for the fiscal year 2023-24, especially for direct taxes. Will this higher tax buoyancy continue in the 2024-25 budget estimates, reflecting better compliance and perhaps even higher growth in the corporate and white-collar salaried sector, or is the buoyancy merely a result of a one-time boost from inflation dynamics? This will be an interesting aspect to watch out for.
• 
  Will the Budget’s boost to capex continue?

  “Capital investment outlay is being increased steeply for the third year in a row by 33% to ₹10 lakh crore, which would be 3.3 per cent of GDP. This will be almost three times the outlay in 2019-20”, the finance minister said in her Budget speech last year. In terms of a basic balance of spending by the Centre, the numbers are even more impressive. As a share of total central government spending, the share of capital spending reached 22.2% in the 2023-24 Budget Estimates, the highest this number has been since 2004-05. The capex push of the government has been critical in supporting overall growth despite a tepid momentum from private consumption. Whether or not the capex tilt in the budget will continue as it has tended to under the second Modi government is a function of the first and second questions discussed above. A big-bang commitment with an eye on the polls (most likely a revenue spend) will make it difficult to increase capex share unless the government can find more resources.
• 
  How will the markets react to the Budget?

  Equity markets have by and large factored in the return of the current government. Policy certainty going forward has been a major tailwind for markets in the recent past. The BSE S&P, India’s benchmark equity market index, has gained 6.33% since the results of the last assembly election cycle were announced on December 3. While markets are likely to cheer fiscal consolidation and maintenance of a capex focus, a large revenue spend eyed on the elections could upset sentiment. To be sure, an analysis of BSE S&P on budget day shows that the market’s reactions to the Budget are usually not that extreme. Only four budgets since 2004 have seen the market going up or down by more than 3%. The 2021-22 Budget saw the biggest single-day market gains since 1999 as the government announced increased spending without any significant change in indirect taxes, alleviating the fears of the market amid the pandemic. On the other hand, markets saw a steep fall on the day of the Budget in 2009 due to concerns regarding a high fiscal deficit.