Beyond the budget: What happened when nobody was really looking

High growth so far in 2023-24, supported to a large extent by government capex, has been one of the reasons why the country’s central bank has maintained a tight monetary policy.
High growth so far in 2023-24, supported to a large extent by government capex, has been one of the reasons why the country’s central bank has maintained a tight monetary policy.


  • This year marked the return of state capex alongside central. And 2024-25 could mark a gradual pivot from fiscal to monetary easing.

It’s that time of the year. All eyes are on the budget this Thursday, closely followed by the Reserve Bank of India (RBI) policy meeting a week later. What’s at stake? What could change? And what will this mean for RBI?

While the upcoming budget is an interim one, and the government will release the final budget after the May national elections, it’s still important as the final budget is likely to follow along similar lines. The interim budget will also set the stage for state budgets that take cues from the central government to varying degrees. The interim budget will also signal how serious the central government is about fiscal consolidation. Recall that it plans to lower the fiscal deficit from 5.9% of gross domestic product (GDP) in fiscal year 2023-24 to 4.5% of GDP by 2025-26.

A lot has happened on the fiscal front in the past year, with some efforts better known than others. But together, they will likely set the boundaries for the upcoming budget. We discuss some of these below.

Soaring tax receipts saved central targets: Tax revenues have soared so much that they’re now 0.3% of GDP higher than budgeted. This buoyancy will likely fund a rise in subsidies and any special spending packages announced on budget day. Capital expenditure is expected to show a rise in 2023-24, but not by as much as budgeted (22% year-on-year versus 36%). All considered, the fiscal deficit is likely to be in line with the budgeted 5.9% of GDP in 2023-24.

Taxes are likely to grow quickly in 2024-25 as well (we assume tax buoyancy of 1.1%). After all, structural benefits, such as those made possible by digitization and better tax information, are likely to help for many years. Capital receipts may also increase post elections if some pending disinvestment comes through as a policy priority.

The government could shave current expenditure after elections, perhaps by cutting in half the increase since pre-pandemic levels (as a proportion of GDP). Meanwhile, we expect capex to remain unchanged as a percentage of GDP in 2024-25.

All of this is likely to lead to a fiscal deficit of 5.3% in 2024-25, signalling that the government is committed to its fiscal consolidation path (of a 4.5% deficit by 2025-26).

States have ramped up good-quality spending: While we have closely analysed central government policy, the real action this year has been in India’s state finances. After weak spending in 2022, the states ramped up their spending sharply in 2023. Notably, state capex was up 46% year-on-year between April and November 2023. State revenues did not grow as sharply. As a result, the cash balances of states fell, and market borrowings by Indian states rose quickly.

Given the spending momentum, we expect the consolidated state fiscal deficit to rise to about 3% of GDP in 2023-24, which is the permissible upper limit, and remain at that level in 2024-25.

By our forecasts, this will peg the central-plus-state fiscal deficit at 8.2% of GDP in 2024-25, lower than the 8.8% in 2023-24, but higher than the pre-pandemic level of 5.9%. It is not a surprise to us that debt levels remain well above pre-pandemic levels and could remain so in the foreseeable future.

Borrowing patterns have changed: Rising state expenditure has also shown up in market borrowing. Going by data for the first three quarters, we estimate that in 2023-24, while the central government’s gross market borrowing is likely to rise by 8.6% year-on-year, state government gross borrowing could increase by a staggering 23.3%.

In 2024-25, too, we expect the growth in gross state borrowing to surpass central government borrowing. Still, growth in gross market borrowing by state and central governments combined is likely to come in below the growth in nominal GDP (2.1% versus 10.6% year-on-year), making the overall borrowing calendar broadly manageable.

The economic growth impulse was strong despite fiscal consolidation: We calculate the likely impact of fiscal consolidation on economic growth. Over this time, the quality of spending has improved, switching from current expenditure to capex. With capex associated with higher growth multipliers, this switch supported growth.

Once we account for that, we find that the ‘adjusted’ fiscal impulse has been positive between 2018-19 and 2023-24. And while it may turn negative in 2024-25 on the back of fiscal consolidation, we think it will probably be only a limited drag on growth.

Fiscal policy influenced RBI decisions: All of this affects RBI decisions. High growth so far in 2023-24, supported to a large extent by government capex, has been one of the reasons why the country’s central bank has maintained a tight monetary policy.

But as the ‘adjusted’ fiscal impulse turns mildly negative in 2024-25, and food disinflation continues, we believe RBI will turn less hawkish as the year progresses. Already, core inflation has softened over the past few months, led by falling commodity input prices, and food prices have fallen sharply in recent weeks. All of this together suggests that inflation could fall below 5% in January, and average 4.5% for the next three quarters.

This opens a window where we expect RBI to ease monetary conditions. We expect it to begin with easier liquidity, initially via a host of variable-rate bond repurchases, followed by a change in its stance to ‘neutral’ by around mid-2024, and finally a 50 basis points repo rate cut in the second half of 2024, taking the repo rate to 6%. So, well, over to the monetary authorities.

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