A country’s Budget is nothing but the plan of how it will meet the expenses and arrange means to achieve them via income sources. A Budget is a financial statement that documents the government’s expected expenditure across all fields for the next year and matches it with the income or receipts expected from various sources.
In India, in other than general election years, on every 1st Feb, the Budget Estimate (BE) for the upcoming financial year is presented, along with the Revised Estimate for the ongoing financial year and actual figures for the previous financial year. The Revised Estimate (RE) is an updated version of the Budget Estimate, reflecting changes and adjustments made during the fiscal year.
The Actual figure represents the final, audited amounts of government revenues and expenditures for the completed fiscal year. In the election year, an Interim budget is presented that includes estimates of revenue and expenditure for the entire financial year, but it is primarily intended to cover the period until a new government takes office. An interim budget is later followed by a Full budget after the new government comes to power.
Understanding the budget and its breakdown is crucial for analyzing its impact on the economy and gauging the broader direction in which the country is progressing.The two broad parts of the budget are: 1) Receipts and 2) Expenditures. Each part can be further categorized into Revenue and Capital.
Revenue receipts include the government’s recurring income through tax revenue (net of states’ share)—direct and indirect taxes—and non-tax revenue such as dividends from PSUs, interest receipts, fees, fines, etc. Income tax, charged on personal earnings, and corporation tax, charged on corporate earnings, are the main sources of direct tax and represented a combined share of 57% in the gross tax revenue of the interim budget for FY 2024-25, a 13% increase from revised estimates for FY 2023-24.
High direct tax revenue suggests an increase in people and companies’ earnings. Goods and Services Tax (GST), Customs Duty, and Excise Duty constitute major indirect taxes. An increase in indirect tax collection reflects buoyancy in the economy and a surge in transactions. GST accounted for 28% of the gross tax revenue in the interim budget for FY 2024-25, a 12% increase from the revised estimates for FY 2023-24.
Capital receipts include borrowings raised by the Government, aid from multilateral financial institutions like the IMF and World Bank, and disinvestment. Through disinvestment, the country raises money by selling stakes in Public Sector Undertakings (PSUs), which also increases operational efficiency. Against the budgeted disinvestment estimate of Rs. 61,000 crore for FY 2023-24, the revised estimate stood at Rs. 30,000 crore. For FY 2024-25, a disinvestment target of Rs. 50,000 crore has been set in the interim budget.
Revenue expenditures include outlays on routine operational activities, salary and pension, subsidies, grants, etc., that do not lead to the creation of capital assets. A budget with above-normal revenue expenditure is termed ‘Populist’. It increases the money supply in the economy and boosts demand, especially in consumer spending, potentially resulting in inflationary pressure if demand surpasses supply. This year it is likely that the government may resort to populist measures to secure vote share ahead of the three state legislative assembly elections – Maharashtra, Jharkhand and Haryana.
Capital expenditures include building physical assets, capacities, and infrastructure, leading to employment generation, increased aggregate demand-supply, and long-term growth. In the interim budget, capital expenditure for infrastructure development and employment generation has been increased by 11.1% to Rs. 11,11,111 crore, representing 3.4 % of the GDP.
The excess of budgeted receipts over budgeted expenditure creates a Surplus budget, while a shortfall results in a Deficit budget, and equality results in a Balanced budget. Classical economists advocated for a balanced budget—meeting needs with available resources—but modern economists support a deficit budget to meet developmental needs with borrowed funds, achieving job creation and growth.
The Budget also serves as a fiscal measure to control inflation and as a counter-cyclical demand-supply management tool. During a recession, the Government might adopt an expansionary approach by increasing spending and reducing taxes to increase the money supply and revive the economy. Conversely, during rising inflation, a contractionary approach by reducing spending and increasing taxes could help maintain price stability.
Most countries today follow a deficit budget, generally expressed as a percentage of nominal GDP, which is economic growth plus inflation. Equity markets usually welcome higher government spending, as increased money flow results in higher demand, more transactions, and growth.
However, bond markets tend to react negatively to government borrowing, as it pushes up yields and lowers bond prices. Additionally, higher borrowings to meet the deficit can increase interest costs and sovereign risk.
As a developing country, India also follows a deficit budget but is gradually controlling it. This is reflected in the 5.1% fiscal deficit (shortfall caused by excess of expenditure over receipts) target set for FY 2024-25 in the interim budget and the revised 5.8% budget deficit level for FY 2023-24, initially set at 5.9%. The government also plans to control the fiscal deficit to 4.5% in FY 2025-26.
Moreover, India’s double-digit increase in infrastructure spending in the interim budget reflects the policymakers’ firm determination towards long-term growth and making India the third-largest economy in the world. Whether the developmental stance of the interim budget continues or populist measures are introduced in the present government’s third full-year budget, following the less-than-expected election win, will be revealed on 23rd July.
I am confident that after getting this brief idea on the broader aspects of the budget, you will be in a better position to analyze the upcoming budget and hone your macro-economic considerations in your investment decisions.
Technical Outlook
ETMarkets.comNifty closed the week higher at 24,531, marking a 0.12% increase from the previous week. However, after a sharp decline last Friday, the index closed lower in the daily time frame after marking its all-time high of 24,854.
Global markets have also shown slight weakness in the short term which impacted the domestic market. Nifty remains above its 20-day moving average (DMA) around the 24,200 level, which serves as a crucial support zone. The primary trend remains strong as long as Nifty holds above the 24,140 level.
The India VIX, currently at 14.82, is approaching the 15 level, indicating probable increased volatility that could unsettle the bullish sentiment. Some sector rotation might drive the market in the short term, particularly following the upcoming key event of the Final Budget.
Source link
