Union Budget | Align aspirations with emerging opportunities, prepare for challenges ahead

A few days into January, as the excitement of the New Year settles and the fog on reality begins to lift, public attention shifts back to money matters and all things serious. As the next Union Budget is just around the corner, hopes and expectations begin to rise on the benefits and relief it may bring. Understanding the multiple forces at play in shaping a Budget may help us temper our expectations with a healthy dose of realism, all the while remaining hopeful.

These days, with sustainability and social responsibility peppering every discourse, economic growth and equity are uttered in the same breath. However, one does not always guarantee the other. Achieving social and economic equity requires conscious efforts targeted at the rural, economically disadvantaged, and the vulnerable population — providing them the environment and opportunities to grow and thrive. This requires spending on reskilling and upskilling schemes, soft loan schemes, investing in housing, infrastructure, education, and healthcare for all.

The middle class should not be left behind too, lest it remains trapped in a limbo of apparent economic comfort that belies the precarious ‘one-hospitalisation-away-from-bankruptcy’ reality.

On the other hand, achieving growth on the scale envisioned by the government amidst the geopolitical challenges, even just about 7%, requires giving impetus to the capital economy. This may take the form of performance-linked incentives to crucial sectors, tax sops to industries, and investments in infrastructure and energy. The Budget must balance between apportioning the government kitty between equity and growth.

Next comes the tussle between the expectations of the middle class and the need to manage the fiscal deficit. There is popular demand for more tax reliefs for the middle class, especially, by increasing the income tax threshold and the standard deduction for the salaried. While businesses are allowed to claim their legitimate business expenses as deduction from their revenues, the standard deduction for the salaried falls short of providing a semblance of the same. Despite the increase from Rs 50,000 to Rs 75,000 in the last Union Budget, it is still regrettably low, given the rising prices. However, yielding to these demands will strain the fiscal deficit, which is already estimated at 4.9% for FY 2024-2025. The aim is, however, to bring it down to 4.5%.

Beyond tax reliefs, there are several areas that need more focus in public spending — making public spaces inclusive, accessible and safe; ensuring robust disaster management; building resilient infrastructure; investing in green energy and transport; fostering research and development; and, establishing more secondary and tertiary healthcare centres in rural and semi-urban areas. All of these require significant expenditure. If the government prioritises tax cuts, aspirational spending in these areas may face pruning.

Next comes the ever-present delicate dance between public spending and inflation. Fiscal spending has a positive effect on growth but also has an inflationary effect, and may sometimes require counterbalancing with monetary policy measures. Currently, the year-on-year inflation rate based on consumer price index, stands at 5.22%. In July and August, it was below 4%, while in October, it scaled 6.21%.

The RBI’s mandate is to maintain inflation within the tolerance band of 2-6%. It is not that inflation must be avoided at all costs, but just that it should be manageable and not become sticky. High inflation erodes the purchasing power of people. With global uncertainties already weighing on the economy, if inflation increases further, the RBI may have to intervene with increase in policy rates, which would dampen growth. So, the government must tread carefully here.

There may also be demands on the government to announce more ‘ease of doing business’ measures. With foreign portfolio investment outflows continuing and geopolitical pressures increasing, the pressure to firmly establish India as an attractive investment destination is likely felt. Though these may not directly relate to the apportionment of the Budget pie, the Budget Speech may contain some announcements in this regard.

Easing may take the form of slightly relaxing the regulatory requirements in the stock markets, boosting the International Financial Services Centre at Gujarat GIFT City, reducing compliance formalities for corporates, and other incentives for setting up shop here. If such measures are on the cards, the government must ensure that they are done without diluting the policy and without compromising its oversight and enforcement responsibilities.

While these measures may not have a direct or immediate impact for the public, achieving this balance could create a trickle-down effect through healthier investment climate, deeper and more vibrant markets, greater economic stability, and more job opportunities.

The Union Budget is a fine balancing act, one that requires foresightedness and responsiveness in equal measure. Understanding the macro impact of the Budget can help us align our aspirations with emerging opportunities, while preparing for the challenges ahead.

(Usha Ganapathy Subramanian is a practising company secretary, and Ranjith Krishnan is a sustainability consultant.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.