A lot of expert commentary on the Budget 2024-25 was that it was inconsequential since it was an interim one. A full Budget will be presented in July 2024 when the new government assumes office in May 2024. The latest opinion polls put the Bharatiya Janata Party-led coalition at the front. The highlight of the interim budget was the focus on fiscal consolidation. Many of you may wonder what it means and why it matters in an election year.
There is a tendency to adopt a loose ‘fiscal policy’ ahead of general elections. Governments tend to spend money on offering freebies to people to garner votes. The fiscal position of the present government is strong enough to cheer individual taxpayers with incentives and the poor with free food or cash. However, there seems to be an emphasis on remaining on the ‘fiscal consolidation’ glide path. That perhaps shows the confidence the present regime has about the election outcome.
Fiscal consolidation may sound harsh for you as an individual because there are no straightforward tax concessions or free money incentives. However, it is vital for your long-term financial planning. A government that is conservative on spending money is good for the inflation and interest rates in the economy. India’s fiscal deficit is expected to be 5-6% on average and much more if you add state governments.
Governments fund excess expenditure by borrowing in the market. That reduces the money available for businesses and individuals. It adds to inflation and leads to high-interest rates. You do not want your governments to offer free money or incentives without adequate resource planning.
A good government will also focus on good spending. It is very clear from the data released over the years during the budget that the present regime in New Delhi concentrated on a higher capital expenditure. However, the government also had to spend significant resources on food security and fiscal support after the COVID-19 pandemic. It is likely to take a few years of fiscal consolidation for the government to recoup the higher spending already incurred. India’s infrastructure needs are rising every year with a growing population.
The present government is looking to spend a record amount on infrastructure. The subsequent governments need to continue to do more than the present government. No matter the political composition of the governments that assume power in 2024 or the future, governments that spend more money on building physical and social infrastructure are good governments for your money, too. They must curb their urge to live beyond their means, focus on reducing endemic corruption and leakages and still win votes. A good government will strive to strike a balance, which should keep the long-term interest rates in check.
What it means
The interplay of interest rates and inflation influences the value of your money. Suppose the consumer price inflation in the economy remains high for a long time; then, it erodes the value of your income. Your expenses rise as you need to spend more yearly for the same amount of goods and services. That puts pressure on your ability to save and invest. Your financial future depends on your ability to save and invest more yearly. If you notice that you are doing less yearly, the external environment is not conducive. Your income needs to grow and keep up with the momentum of your expenditure. At the same time, you need to allocate more money towards your future life goals.
If a government is not managing finances better, it borrows more money from the market. A good government will strike a balance between revenue and expenditure. It will not borrow more than planned. Any excess borrowing by the government ‘crowds out’ businesses and individuals from the credit market. That leads to lower borrowing by businesses and individuals. It leads to them cutting spending. If the demand for goods and services slows, the overall productivity in the economy is affected, slowing down the economy. Your money deserves better management of government finances.
Rajas Kelkar
(The author is editor-in-chief at www.moneyminute.in)