Fiscal adjustments to promote growth

Special fiscal packages have been provided to Bihar and Andhra Pradesh to protect the political stability of the government along with the macroeconomic stability of the economy.

The Union Budget for 2024-2025 (FY25) sends a strong signal of fiscal consolidation even as it tries to address some key growth priorities. While the fiscal deficit target for FY25 is now pegged at 4.9 per cent (versus 5.1 per cent in the Interim Budget), the gross market borrowings are lowered further to Rs 14.01 trillion as against Rs 14.13 trillion in the Interim Budget. This is expected to help support a lower bond yield curve at least in the near term.

The quality of fiscal spending is finely protected as the government sticks to its capex target of Rs 11.11 trillion for FY25, which works out to 3.4 per cent of GDP. Growth in total expenditure is controlled by controlling the growth in current expenditures, especially by lowering the subsidy allocation to fertilisers (-13.2 per cent), food (-3.3 per cent) and petroleum (-2.6 per ent). However, against the backdrop of growing rural stresses, the flagship scheme for rural employment — MGNREGA has been allocated Rs 860 billion (vs Rs 600 billion in FY24); the same as the Interim Budget.

Also, compared to the previous financial year, subsidy support is increased for the credit-linked subsidy scheme to economically weaker sections, interest subvention scheme, price stabilisation fund (which protects farmers against cost volatility) and the PM Annadata Aay Sanrakshan Yojana (to ensure remunerative prices to farmers). This was done as the outlook for agriculture has further worsened this year due to the slow and unequal pace of monsoon rainfall over and above last year’s subdued performance.

To address the issues of increasing unemployment and weak consumption sentiment among lower income classes, the government has increased allocations for centrally sponsored schemes such as the PM Awas Yojana (both rural and urban) and decided to provide financial support for loans up to Rs 1 million for higher education in domestic institutions and to provide 12-month internship opportunities to 10 million youth in top 500 companies for a five-year period. To incentivise consumption, it has reduced the custom duty on mobile phones, accessories, chargers, etc. As was expected, special fiscal packages have been provided to Bihar and Andhra Pradesh to protect the government’s political stability along with the economy’s ‘macroeconomic stability’.

On the revenue side, Finance Minister Nirmala Sitharaman has pencilled in a net tax revenue of Rs 25.84 trillion for FY25, up 11 per cent of the revised estimate of Rs 23.27 trillion for FY24 but lower by 1 per cent from what was budgeted in the Interim Budget. The Union government expects a slight improvement in personal income tax receipts but some deterioration in corporate income tax receipts over its estimates in the Interim Budget.

Projections for the Goods and Services Tax (GST) too reveal the government’s optimistic outlook on the household sector’s income growth and consumption spending in FY25. Even from the non-tax revenue side, the government expects good returns (Rs 1,203 billion) in FY25 from licence fees and the sale of spectrum to telecom companies. A significant portion is expected to come from past auction dues, spectrum usage charges, and licence fees. Privatisation receipts remained unchanged from the Interim Budget at Rs 500 billion, higher by 40 per cent than Rs 300 billion in FY24.

To enhance revenue generation, a hike is announced in the long-term capital gains tax from 10 per cent to 12.5 per ent. This might have been driven by the equity market bubble and huge profit-booking by investors. Actually, a signal towards this move was given by the government’s Economic Survey for FY24 released on July 22, which stated that “if equity market’s claims on the real economy are excessively high, it is a harbinger of market instability rather than resilience”. Many changes were also introduced for those opting for the new income tax regime including a revision in the standard deduction for individuals and pensioners. The Government of India expects these changes to benefit about 40 million salaried individuals and pensioners.

It is laudable that the government has stayed committed to fiscal discipline and has defined a more aggressive fiscal glide path. However, its measures to address the lingering concerns on increased unemployment, income and consumption inequality, declining trend of foreign direct investment are nearsighted.

Many economists advise India to look at the success of East Asian nations to draw relevant lessons. But we need to understand that these countries did many fundamental things that laid the foundation for their superior economic growth performance. ‘Universal Education’ and ‘Primary Health Care’ were a key element of their economic reforms. Their economic growth model, termed ‘Productivist Welfare Capitalism’ (PWC), symbolised a model of strong State intervention in the macroeconomic design. This model placed greater emphasis on State-funded public education and health and lower emphasis on other subsidy measures. Their policy choices were governed by their demographics. Given a higher percentage of young people, these nations tried to develop a highly educated, skilled and healthy workforce that could contribute to economic growth. All East Asian countries made heavy investments in education and healthcare, with the State playing a central role in these sectors.

If we look at the actual share of funds allocated by the recent Union Budget to these two primary sectors, the resultant picture is quite worrisome. So far as the spending on ‘education’ is concerned, its share in total GDP has stayed around 0.37 per cent during FY23 to FY25 and for spending on ‘health’, the share is hovering near 0.27 per cent for the same period.

Budgets (both at the central and state levels) need to focus more on creating a framework for long-term growth rather than doling out largesse to the stressed sectors, year after year.

(Rupa Rege Nitsure, former chief economist in the BFSI sector, is a research economist.)

Union Budget 2024 LIVE | Making a record for any Finance Minister, Nirmala Sitharaman presented her 7th consecutive Union Budget on July 23, 2024 under the Modi 3.0 government. This Budget brought tax relief for the middle class, while focusing on jobs through skilling, incentivising employers. Track the latest coverage, live news, in-depth opinions, and analysis only on Deccan Herald. Also follow us on WhatsApp, LinkedIn, X, Facebook, YouTube, and Instagram.