Consumption to investment: Key factors to consider in Union (interim) budget 2024-25

Finance Minister Nirmala Sitharaman is all set to present her sixth budget on February 1. The interim budget 2024-25 will, however, be a vote-on-account. It will merely provide the government authority to spend certain sums of money till a new government comes to office after the April-May general elections.

The first advance estimates of national income released by the National Statistical Office(NSO) on January 5 has placed the real gross domestic product growth for 2023-24 at 7.3 per cent, up from 7.2 per cent in the preceding year. But this is no reason to cheer- specific issues festering within the economy needs to be addressed right away irrespective of the nature of this budget.

Besides accommodating inflation worries and challenges of deficit financing, the finance minister will need to factor in all the key elements of GDP- private consumption, gross private investment, government spending, net exports- while drafting the budget.

​Consumption
Private consumption, which accounts for 57 per cent of India's GDP (in 2023-24), has been falling for the past three years. While there has been an increasing demand for premium goods, the mass market continues to be affected by depressed consumer demand. The K-shaped economic recovery post-pandemic and the increasing income disparity have affected the spending of consumers at the lower end of the spectrum.

Growth in private final consumption expenditure (PFCE) moderated to 4.4 per cent from 7.5 per cent a year ago, primarily due slackening rural demand. Urban demand, on the other hand, remained robust on the back of higher disposable income, led by robust growth in salaries and wages. India can hardly benefit from the large population if a majority of workforce has limited income to spend.

The budget should focus on pumping money to the hands of these target groups to boost the economy. Meanwhile, inflation has to be restrained to its target for growth to be inclusive and sustained.

Expenditure
The government’s sustained thrust on capital expenditure along with buoyancy in residential housing is one of the primary reasons for India's rosy GDP estimates. According to recent figures, the gross fixed capital formation (GFCF), accounts for around 34.9 per cent of India's GDP in 2023-24. The government spending has remained strong with a growth of 10.3 per cent last year.

Since the consumer demand is still lacking, the government needs to continue pushing growth through public capital expenditure.

Investment
The NSO's recent estimates has underpinned a shift from consumption to investment. According to the report, the government’s thrust on capex has started to crowd-in private investment as high corporate profitability in consecutive quarters has begun to induce the creation of fixed assets. The housing market is seeing its highest sales in more than a decade and real estate is exhibiting remarkable resilience and adaptability. The government's push to boost investment has managed to offset the negative trends in consumption. However, global investors are still hesitant to invest in India despite the remarkable growth story as the consumer demand is still lacking.

Exports
India’s export growth, tapered to 1.4 per cent in 2023-24 (April-November), primarily on account of sluggish merchandise exports, while services exports registered steady growth. As the growth in imports far outpaced the growth in exports, external demand dragged down overall growth of the economy. Incidentally, India recorded a trade deficit with nine of its top ten trade partners in the first seven months of 2023-24, with the US being the only exception. The Red Sea crisis is not helping matters either. The government will need to chalk out strategies such as push towards driving ‘service-based export’ growth and aggressive marketing for merchandise exports to improve the trade deficit.