Big tax boost lets Nirmala raise Capex & yet cut deficit sharply

The Budget for 2024-25 looks at first glance like a finance minister’s dream come true.

Nirmala Sitharaman

has been able to sharply raise the outlay on

capital expenditure

, which is spending on creating productive assets, over the “provisional actual” (PA) figures for 2023-24 without resorting to borrowing more.
As a result, she has been able to project a dramatic cut in

fiscal deficit

.

How has this been possible?
Let’s look at the receipts side of the Budget to begin with.

Revenue receipts

are projected to rise about 15% over PA 2023-24 from Rs 27.3 lakh crore to Rs 31.3 lakh crore.

Part of this is to come from higher tax receipts, which Sitharaman estimates will rise by 11% from Rs 23.3 lakh crore to Rs 25.8 lakh crore after the share of states has been accounted for. The rise in tax revenues, in turn, is projected to happen largely because of individual income tax collections rising by almost 14% from Rs 10.4 lakh crore to Rs 11.9 lakh crore. income tax on corporates as well as goods and services tax (GST) are expected to record more modest increases of about 12% and 11%, respectively.

Non-tax revenues are expected to go up even more sharply from Rs 4 lakh crore to Rs 5.5 lakh crore. This is mainly because dividends and profits that govt earns from the public sector and Reserve Bank of India are slated to jump 70% from Rs 1.7 lakh crore to Rs 2.9 lakh crore, most of this being on account of the record divi dends from RBI.
In contrast to revenue receipts, capital receipts are expected to decline a touch from Rs 17.1 lakh crore to Rs 16.9 lakh crore despite “miscellaneous capital receipts” (essentially proceeds of divestment of govt equity in public sector firms) rising from Rs 33,122 crore to Rs 50,000 crore. The decline is mainly expected to come due to reduced borrowings – Rs 16.1 lakh crore compared to Rs 16.5 lakh crore in PA 2023-24.
Total receipts, the summation of revenue and capital receipts, are therefore projected to rise 8.5% from Rs 44.4 lakh crore to Rs 48.2 lakh crore. As a result, the FM has been able to provide Rs 15 lakh crore for “effective capital expenditure”, which includes grants-in-aid for creation of capital assets, and yet cut fiscal deficit – in essence the gap between total expenditure and receipts that do not involve aliability for the future – to 4.9% of GDP from 5.6% last year. That 0.7 percentage point drop represents the sharpest cut in deficit in over a decade if we exclude the cut in 2021-22 after the Covid-induced spending surge in 2020-21. The revenue deficit, which economists consider perhaps an even more important measure of fiscal health, is also estimated to come down from 2.6% of GDP to 1.8%.