2024 Interim Budget: Mistakes Nirmalaji Can Avoid

Pre-Budget exercises should scrupulously avoid adventurism of all types and refrain from making excessively ambitious projections on revenue and expenditure numbers for 2023-2024, suggests A K Bhattacharya.

The Union finance ministry has kicked off the Budget exercise for 2024-2025.

The pre-Budget discussions to finalise the revised estimate (RE) for 2023-2024 and the budget estimate (BE) for 2024-2025 will take place in North Block, the headquarters of the finance ministry, from October 10 to November 14.

Representatives of all key central ministries will take part in these meetings and will help the finance ministry assess how the RE for both revenue and expenditure should look like for the current financial year.

More significantly, these meetings will also provide an indication of the nature of expenditure provisions for various schemes needed for 2024-2025.

Even though the forthcoming Budget to be presented before the general elections will be a vote on account, the pre-Budget exercise to be undertaken in the next few months should not be treated lightly.

No Budget exercise should make estimates of the government's revenue and expenditure that are not rooted in reality.

Nor can these projections afford to be sharply different from what will eventually emerge as the actual numbers.

It does not really matter if what Finance Minister Nirmala Sitharaman presents in February 2024 would be an interim Budget.

Remember that five years ago, a similar exercise undertaken at around the same time led to a fiscal fiasco.

The RE for gross tax revenue in 2018-2019, as indicated in the Budget tabled in Parliament on February 1, 2019, was set at Rs 22.48 trillion, and that for total government expenditure at Rs 24.57 trillion.

Just four months later, these figures had to be revised downwards significantly to Rs 20.8 trillion for gross tax revenue and Rs 23.15 trillion for total expenditure.

Thanks to an upward revision in the nominal size of the economy, there was no adverse impact on the fiscal deficit number.

Nevertheless, the lower revenue number had forced the government to effect a substantial cut in expenditure so that the deficit target could be met.

The problem got worse with the final Budget for 2019-2020 presented in the first week of July 2019.

Even though the finance ministry had access to the provisionally audited accounts of the government's revenue and expenditure, the full Budget for 2019-2020 chose to use the RE numbers of 2018-2019, given in the interim Budget, for making its projections for 2019-2020.

This made the task of achieving the numbers for 2019-20 even more difficult.

Thus, one year's mistake committed in the pre-Budget exercise played havoc with the numbers of two successive Budgets.

The pre-Budget exercise, therefore, should scrupulously avoid adventurism of all types and refrain from making excessively ambitious projections on revenue and expenditure numbers for 2023-2024.

It would be more sensible to under-promise with the RE numbers and then over-deliver when the actual numbers are released.

This would also help in projecting more realistic revenue and expenditure numbers for 2024-2025, when they are presented in the final Budget after the elections.

To be sure, the Union Budgets presented after July 2019 began to eschew such adventurism and the projections were firmly rooted in reality.

The last four Budgets also imparted transparency to the way the government funded its expenditure.

But the pre-Budget exercise is going to be different and there is a need for the finance ministry to be transparent, pragmatic and cautious.

To begin with, it must recognise that the character and content of interim Budgets have changed significantly in the last several years.

Of the last four interim Budgets, at least three had refused to follow the tradition of eschewing big announcements of schemes or taxation measures.

The interim Budgets of 2004 and 2014 (the interim Budget of 2009 had stuck to the tradition of avoiding any policy or taxation announcement) proposed taxation changes, though their impact was small.

The interim Budget of 2019 made two big announcements.

The PM Kisan scheme was rolled out to provide Rs 6,000 to each farming household with a land-holding of less than two hectares -- a scheme whose coverage was subsequently expanded to cover all farming households.

In addition, individual taxpayers with an annual income of up to Rs 5 lakh were given the benefit of the full tax rebate.

The interim Budget of 2024 could, therefore, be expected to follow the same tradition of announcing tax giveaways and big schemes.

Individual taxpayers could be given another dose of relief as was done in February 2019.

Given the financial stress in small companies, a new package of tax concessions cannot be ruled out.

There will be political pressure on the finance ministry to increase the amount of income support for each farming household in order to capture the impact of inflation in the last five years.

If the free food grain supplies under the public distribution system is extended beyond December 2023, which is very likely, the interim Budget of 2024 must make necessary expenditure provisions for it.

The likelihood of providing interest subsidy for housing loans cannot be ruled out, which could mean an additional financial burden of Rs 60,000 crore (Rs 600 billion) over the next few years.

The subsidies scheme, too, would have to be adequately funded as retail prices for cooking gas cylinders have already been reduced and a further rise in fertiliser prices could result in a higher fertiliser subsidy burden not just for the current year but also for 2024-2025.

The list of such tax reliefs and additional expenditure items could be longer.

Not surprisingly, the team in the finance ministry could come under tremendous pressure to both increase expenditure, forgo revenue, and at the same time keep the deficit under check.

The finance ministry thus might be tempted to present over-optimistic revenue projections, in the mistaken belief that these distortions could be corrected in the final Budget to be presented after the general elections.

Such opportunities do not really exist, as was seen in 2019.

The temptation to be generous with revenue projections, therefore, must be avoided under all circumstances.

As it is, the new system of presenting the Budget by February 1 has made the task of estimating the full year's revenue projections difficult.

And when the revenue and expenditure projections are to be made for an interim Budget, the need to respect their sanctity becomes even more paramount.

Feature Presentation: Aslam Hunani/Rediff.com