Budget
Budget 2025 preview — Part 1: Fiscal deficit, FDI, disinvestment, energy issues
Summary
- Some of the biggest questions facing India's budget-making, presented in charts.
Foreign investment: The cracks beneath India's $28-billion FDI inflows
Foreign direct investment (FDI) inflows into India—investments by foreign entities in domestic businesses—hold the potential to transform the economy. They act as a catalyst for enhancing competitiveness and channel much-needed capital into underinvested sectors, such as semiconductors, where domestic companies have been hesitant to venture.
In 2023, India attracted $28.1 billion in FDI inflows. However, this seemingly impressive figure reveals underlying weaknesses. Despite being the world’s fifth-largest economy, India ranked only 16th globally in FDI inflows. The US and China dominated with 23% and 12% shares, respectively, while India managed a modest 2.1%. These numbers underscore the need for India to capture a larger share of the global FDI pie.
Read this | In charts: How FDI flows into India lost momentum
Not only that, India's FDI inflows in absolute terms for 2023-24 were lower than the annual average recorded during the five-year period from 2006-07 to 2010-11. Moreover, when measured against the size of the Indian economy and its total capital formation, FDI inflows have failed to keep pace with the country's growth trajectory.
If India is to emerge as a serious contender for companies looking to diversify their manufacturing base beyond China, the government needs to look at policies and procedures that make doing business in India easier.
Fiscal deficit: Tax buoyancy holds the key to managing deficits
India introduced the Fiscal Responsibility and Budget Management (FRBM) Act in 2003, targeting a fiscal deficit—the gap between government spending and revenue—of 3% of GDP. However, this goal has been achieved only once, in 2007-08. By 2018-19, India appeared on track to meet it again, but the pandemic disrupted fiscal calculations.
In 2022-23, the last year for which actual numbers are available, the Centre's fiscal deficit stood at 41% of its total expenditure, financed primarily through borrowings that add to the nation’s debt and interest obligations.
Interest payments alone accounted for 3.5% of GDP that year, while tax revenues—the government’s primary income source—stood at 7.8% of GDP. This means nearly half of tax revenues were consumed by unavoidable interest payments.
Read this | Mint Primer | The 3% fiscal deficit target: Is it sacrosanct?
Managing the fiscal deficit requires two approaches. Cutting expenditure, though effective, is politically and practically challenging. The more sustainable path lies in boosting GDP growth and ensuring tax revenues rise at an even faster pace. This underscores the importance of tax buoyancy in driving fiscal consolidation.
Disinvestment: Public sector enterprises and the dilemma of value
As of 17 December, the stock market valued every ₹1 of net income from 12 public sector banks at ₹1.5, compared to ₹4.2 for 28 listed private banks. This stark disparity underscores the private sector's superior ability to generate business value and reinforces the notion that the government has no business being in business unless necessary. With economic liberalization reducing that necessity, the future of India’s 448 central public sector enterprises (CPSEs)—of which 272 were operational in 2023-24—remains uncertain.
Successive governments have made a case for reducing that number, including this National Democratic Alliance government, which is now in its third term. It started briskly on the disinvestment front, but backed off after the pandemic. Air India is its only sale of note, and disinvestment receipts have consistently declined and fallen short of targets since 2019-20.
Since 2014-15, strategic disinvestment—where ownership control shifts to private hands—accounted for just 16% of the ₹4.36 trillion raised through disinvestment. Most proceeds came from share sales where the government retained control. Of the 33 companies slated for strategic disinvestment, only 10 have been completed, with nearly half deemed unfeasible or still in process. This hesitation and lack of decisiveness risk undermining India’s economic growth ambitions.
Energy transition: The long road to reducing usage of fossil fuels
Like all countries, India needs to transition from conventional sources of energy to renewable sources that are less polluting, like solar power. Last year was a tipping point of sorts in solar. In response to a tender by Indian Railways, round-the-clock renewable solar power—which combine solar panels and battery storage—was cheaper than coal-based power. A sharp decline in prices of solar panels and batteries has made solar power competitive.
Read this | Data dive: Dark clouds hover over India’s solar story
Credit rating agency ICRA estimates the share of renewable energy in India’s power generation to increase from 23% in 2022-23 to 40% by 2030. But in terms of the country’s total energy consumption—be it to run power plants or motor vehicles, among other things—fossil fuels still accounted for 90% of India’s energy sources in 2023. It hasn’t changed much in the past decade.
In the power-generation space, renewables will increasingly become more competitive, accelerating India’s transition from coal. As of now, only a fraction of the potential capacity in renewables has come up. Even that capacity is not firing fully. Solar, for instance, accounted for 20% of India’s total power capacity but only 7% of supply, as of March 2024. A bridging of those two numbers needs to happen to reduce the footprint of fossil fuels.
www.howindialives.com is a database and search engine for public data.
