Budget 2024: Tax buoyancy remains strong, future surprises unlikely: Nikhil Gupta

Budget 2024: 

Tax buoyancy is expected to remain good, but the positive surprises seen in the past three years are unlikely to continue. The gains from improved compliance and economic momentum post-pandemic may have reached their peak. While tax buoyancy may remain stable, the exceptional growth observed recently may fade over the coming years.

On India's Economic OutlookAs the government is set to unveil the budget 2024, in an exclusive conversation with Republic Business, Nikhil Gupta, Vice President, and Chief Economist, Motilal Oswal delves into the key themes of the upcoming budget, the focus on capital expenditure, fiscal deficit management, job creation, tax buoyancy, and the overall economic outlook for India. Gupta shares his perspectives on how the government might utilise additional resources, the implications for fiscal prudence, and the potential impact on India's growth momentum amid various domestic and geopolitical risks.

On the Top Themes of the Budget

The interim budget is the focus of this new budget, which will be presented by the finance minister this month. The spotlight is on the extra money the government has received from the Reserve Bank of India (RBI). Initially, the government had budgeted total resources of somewhere around Rs 60,000-70,000 crore from the RBI's dividends this year. However, the RBI has now provided more than Rs 2 lakh crore. The key question is how the government will spend this additional money. Will they use it to reduce the fiscal deficit? This is the most interesting aspect everyone is watching in this budget.

It's important to note that the budget is just one event. The government can implement policies and announce measures throughout the year. While the budget garners significant attention, urgent matters need not wait for it. This budget is particularly significant as it is the first budget of the new government and the first time in a decade that the BJP government is leading this coalition. Observers are keen to see if the BJP-led coalition will continue its principle of fiscal prudence, focusing more on reducing the fiscal deficit than on stimulus measures.

On Capex

The interim budget already presented Rs 11.1 lakh crore for capital expenditure, reflecting a growth of roughly 17 per cent. To achieve 20 per cent growth, they need to increase it by only Rs 20,000 to 30,000 crore, not as much as Rs 60,000 crore. Given that the central government capex has grown more than 30 per cent per annum over the last three years, achieving another 20 per cent growth is respectable. Therefore, it's unlikely that the capex budget estimates will expand significantly, perhaps increasing by Rs 20,000 to 30,000 crore, bringing it to around Rs 11.5 lakh crore.

On Fiscal Deficit

The government has additional resources amounting to approximately Rs 1.3 to 1.4 lakh crore this year, beyond the budget estimates presented in February. Reducing the fiscal deficit from 5.1 per cent to 5 per cent would use up about a quarter of these additional resources, while a reduction to 4.9 per cent would utilise nearly half. Reducing the fiscal deficit to at least 5 per cent is essential, and a reduction to 4.9 per cent would be a positive signal for the debt market, depending on the use of the remaining Rs 60,000-70,000 crore of additional resources.

On Jobs and Employment Creation

Employment creation is an ongoing concern, and the government is likely aware of this throughout the year. They need not wait for the budget to announce policies in this area. If the budget includes specific measures for employment, it is a bonus. Data from the annual periodic labour force surveys and the Reserve Bank of India's database show that total employment growth has been strong post-COVID, particularly in the agricultural sector. However, agricultural employment is not as productive as non-agricultural employment. Even without specific measures in the budget, increased capex itself generates employment.

Overall employment growth has been very good, but within overall employment, it's the farm or agricultural employment that has grown much faster than the non-farm or non-agricultural employment. Now we know the agricultural sector or agricultural employment is not as productive as the rest of the economy's employment is. And that is why there are a lot of nuances that we need to consider.

Again, coming back to what I stated at the beginning, if the government comes up with a certain, particular scheme to improve the employment situation, it is well and good. But I am not expecting a lot because the budget is not the only time when they can do so. They can do it throughout the year.

I would not be surprised or disappointed if there is nothing in particular for the employment because in any case, they increase their capex. That itself is generating employment. So they are doing what they can do.

On Tax Buoyancy

India's growth momentum has been strong for the past four quarters, with GDP growth exceeding expectations. FY24 was exceptional, and while FY25 may not be seen as strong growth, achieving 7 per cent growth, as forecasted by the RBI, would still be commendable. However, several risks persist, such as the monsoon's impact on agriculture, and geopolitical tensions, including the Israel-Gaza conflict and the Russia-Ukraine war, which could disrupt commodity prices.

On Higher Interest Rates

Domestically, higher interest rates are not currently seen as a constraint on growth, and the RBI is unlikely to cut rates soon. Overall, India's economy is performing well, with strong momentum and manageable risks.