The first official gauge of the economy’s performance so far in 2024-25 pegs real GDP growth at 6.7% between April and June, a five-quarter low and below the central bank’s projection. The Reserve Bank of India (RBI), which expects a 7.2% GDP growth through 2024-25 following last year’s 8.2% surge, had revised its estimate for Q1 from 7.2% to 7.1%, earlier this month. The actual numbers are underwhelming and mark a clear cooling in the economic momentum, although some base effects are in play. Growth in the Gross Value Added (GVA) in the economy came in higher at 6.8%, after a year of widening divergences with the GDP print. At the onset of this fiscal year, major hopes hinged on a normal monsoon boosting farm sector output and easing inflation, which could lift the weak rural demand and private consumption witnessed last year. Higher demand would bolster private firms’ propensity to invest in new capacities, and ease the pressure on public spending to prop up growth. That the government would still ramp up capital expenditure by 17% to ₹11.11 lakh crore this year, while it waited for this narrative to unfold, was the other pillar underpinning this year’s growth aspirations.

As things stand, this script is yet to fully play out. The stretched general election has sharply scuppered public capex, and the government will need to redouble efforts to meet its spending goals. The good news is that private consumption spends bounced to a six-quarter peak of 7.4%, partly thanks to easing headline inflation. But food prices remain elevated. The monsoon has been better than last year but a tad erratic and uneven, temporally as well as spatially. Farm GVA growth has moved up to a four-quarter high of 2% but the next few weeks will determine whether the sector rebounds in earnest (and food inflation cools). Projections of above normal downpours in September may well affect standing kharif crops. This is a key monitorable for the RBI, whose independent monetary policy panel members have flagged a 1% GDP growth loss this year and next, if interest rate cuts are delayed. India may still grow 6.5% to 7% this year, but most expect growth to slip to 6.5% in 2025-26, with the medium-term potential hovering around that number. This is too slow for comfort. As top IMF official Gita Gopinath pointed out recently, policymakers need to urgently pursue meaningful reforms across all aspects of the economy, and improve the efficiency of its institutions and the judiciary. This is critical to lift its growth potential and fulfil hopes of creating gainful employment for its young, fast enough for India’s demographics to yield a dividend.

Just before Nirmala Sitharaman presented her seventh consecutive Budget as Union Finance Minister of a coalition led by the Bharatiya Janata Party (BJP), which managed to gain power for the third time on an underwhelming mandate, signals from the government seemed to suggest what its thrust may be. The Economic Survey 2023-24 made clear that while India’s industrialists and business elite were “swimming in excess profits”, the priority of the government was not to tax away that excess for developmental purposes, but to ease the burden of regulation on business and goad the private sector into generating productive jobs out of “enlightened self-interest”. Business must lead the march to Viksit Bharat 2047, and the job of the government is to persuade the private sector not to shy away from leadership.

Outside government, speculation was rife on two matters. The first concerned the possible response of the National Democratic Alliance (NDA) to the signal from the parliamentary elections that the strategy of sidestepping core economic problems — varying from rural distress and widespread unemployment to inflation, especially food price inflation — could prove costly. The second related to the scale and the structure of the pay-off to allies, the Telugu Desam Party (TDP) and the Janata Dal (United), or the JD(U), from Andhra Pradesh and Bihar, respectively, who are crucial to keep the post-election coalition government led by the minority NDA in power.

Initiatives and their slotting

The speech did not disappoint by sidestepping these issues, though the beneficiaries of the schemes meant to address them are likely to be disappointed by their scale and efficacy. Embarrassed perhaps by the hordes applying for the few half-decent jobs available, Part A of the Budget speech spent much time on the means to increase employment, especially for the educated unemployed. Multiple initiatives were announced, which broadly fell in two buckets.

One contained schemes that amounted to providing employment subsidies, either directly or indirectly to employers. The scheme to provide ₹15,000 in three instalments to all new employees with salary up to ₹1 lakh a month appears to be directed to those employed in the formal sector. But it is more than likely that the availability of this benefit would influence the compensation package offered by companies attempting to internalise that subsidy. Another set of subsidies, such as the ₹3,000 a month contribution for two years to be made by the government against provident fund subscriptions, accrues directly to employers.

A second bucket consists of schemes, varying from subsidised internships and interest subvention for educational loans, which attempt to ‘skill’ workers largely at state expense, in ways that are expected to make them more employable. The assumption is that it is not inadequate and inappropriate growth, but a skill set mismatch between what job aspirants have to offer and industry needs, that is responsible for unemployment.

Combine this with direct tax concessions for foreign firms and indirect tax adjustments to favour domestic manufacturing, and the picture that emerges is that the unemployment problem is sought to be tackled by persuading private capital with transfers to hire the unemployed in “productive” jobs. The underlying perception, which misses why high growth does not deliver more jobs is that business wants to hire but finds the available labour force too expensive or unsuited, skill-wise.

This mismatch between the problem at hand and what the Budget offers is even more stark when it comes to agriculture. While peasants unable to make both ends meet because crop production is economically unviable have been demanding procurement at a legally guaranteed minimum support price, the Budget promises to implement a long-term programme to raise productivity and production. Farmers who have been on the streets for years now are unlikely to be impressed.

What the key allies have got

The disappointment is likely to be greater among the NDA’s allies. The JD(U) in Bihar has been promised a combination of sundry transport, power, education, sports and religious tourism infrastructure as an implicit quid pro quo for political support, which is a far cry from the large sums that it was expected to receive if granted the special status it demands, but has been denied. The TDP has been offered support to build its new capital at Amravati, on which Chief Minister N. Chandrababu Naidu has staked his prestige and fortunes. But what is shocking is that these promises have not been backed up by significant financial support from the Centre, with much or almost all of the spending to be financed with borrowing, especially from the multilateral development banks (MDBs), facilitated by the Centre. Why the MDBs should listen to the NDA leaders is not clear. But even if they do so, this would only increase the debt burden of these States. Moreover, given the restrictions that have been placed on borrowing by the States, it is unclear how debt for these purposes could be “additional” to what the State may have in any case chosen to incur.

Preoccupied with propaganda aimed at concealing the little that has been done in these politically-sensitive areas, the government in its first year in power has chosen to completely ignore the welfare schemes it made much of in the run-up to the election. Thus, total expenditure for the National Social Assistance Programme covering pensions and disability benefits, which stood at ₹9,652 crore in 2023-24 as per the revised estimates, has been allocated exactly the same amount in the Budget for 2024-25. That is the fate of the National Rural Employment Guarantee Programme, as well, where the allocation for 2024-25 is exactly the same as the revised estimate for expenditure in 2023-24. Despite the extension of the free foodgrain allocation under the National Food Security Act, the food subsidy is budgeted to fall from ₹2,12,332 crore (RE 23-24) to ₹2,05,250 crore (BE 24-25). It is only in the case of the Pradhan Mantri Awas Yojana (PMAY) that there is evidence of backing grandiose statements in the Budget with some increase in allocation.

The ‘secret source’ of funds

So, is there any larger ambition reflected in the Budget? There are two elements that stand out. One is the obsession with fiscal consolidation, with the fiscal deficit expected to come down from 4.9% of GDP in 2023-24 to 4.5% this year, and a promise of staying on that path subsequently. The other is the claim now made every year that the BJP-led government is taking capital expenditure to new heights, especially on infrastructure. Capital expenditure that rose from ₹7,40,025 crore in 2022-23 to ₹9,48,506 crore in 2023-24, is budgeted to rise further to ₹11,11,111 crore in 2024-25. With tax revenues not expected to register any special buoyancy, how are these conflicting targets expected to be achieved? The well known ‘secret source’ is once again dividends and surpluses from the Reserve Bank of India and leading public financial institutions, which, having risen from ₹39,961 crore in 2022-23 to a huge ₹1,04,407 crore in 2023-24, are budgeted to spike again to ₹2,32,874 crore in 2024-25. But even these funds garnered through transfers within the state are not available for welfare spending or meaningful support for allies on whom the government depends. Prime Minister Narendra Modi and his advisers have either not learnt their lessons or believe there is none to be learnt.

C.P. Chandrasekhar is Senior Research Fellow, Political Economy Research Institute, UMass, Amherst, U.S.

Union Finance Minister Nirmala Sitharaman leaves after briefing the Bharatiya Janata Party (BJP) MPs on the Union Budget 2023-24, at Parliament House, in New Delhi on Friday.
| Photo Credit: ANI

BJP MPs on Friday interacted with Union Finance Minister Nirmala Sitharaman on the merits and demerits of the new and old income tax regimes at a briefing here on the Union Budget, which was tabled in Parliament on Wednesday.

Members from both the Lok Sabha and the Rajya Sabha were present at the briefing on the Budget, the last full one before the 2024 Lok Sabha elections, and for which the BJP has drawn up a massive outreach programme explaining the main highlights.

“There was a power point presentation on the Budget and its highlights, but the Finance Minister went into great detail about the new and old income tax schemes, and the changed slabs. Tax issues always require this kind of explanations, they are never easy, and many MPs had queries on the relative merits and demerits,” said a BJP MP present at the meeting.

There were also questions on the slashing of allocation for the Mahatma Gandhi National Rural Employment Guarantee Scheme (MGNREGS) compared with the past few years. The Budget allocated ₹60,000 crore for the MGNREGS, which is 18% lower than the Budget Estimates of ₹73,000 crore for the current year, and 33% lower than the Revised Estimates of ₹89,000 crore for the scheme.

“On this, the Finance Minister said that the the hiked allocations for the Pradhan Mantri Awas Yojana, up 66% in this Budget, especially for tier two and three cities will make up for creation of similar employment. She said that during COVID-19 there were situations for increasing the allocations, and that the scheme is largely demand-driven,” the source said.

The capital expenditure detailed in the Budget was also gone into in detail, and flagged as something that the BJP MPs should speak about when talking about the Budget. The Mahila Samman Patra, a small savings instrument for women with interest rate up to 7.5% for deposits of up to ₹2 lakhs was also talked about.

The BJP kicked off its outreach programme on the Budget on Friday, with Chief Ministers of the States ruled by the party holding press conferences. As part of the programme, Union Ministers will also fan out to the State capitals to talk about the highlights of the Budget.

Union Finance Minister Nirmala Sitharaman during the post-budget FICCI national executive committee meeting in New Delhi on February 2, 2023.
| Photo Credit: PTI

Finance Minister Nirmala Sitharaman on Thursday exuded confidence that States will sign up as early as April to avail the ₹1.3 lakh crore of interest-free loans offered to them in Budget 2023-24 for capital expenditure, much faster than they did in the current financial year.  

This 50-year interest-free loan window for States constitutes a critical part of the government’s ambitious ₹10 lakh crore capex push for the coming year, and the Finance Minister asserted that the scheme’s outlay was raised from ₹1 lakh crore allocated this year only because States had shown interest.  

Data relating to the scheme released in the Economic Survey tabled in Parliament this week appeared to suggest those funds had not been fully tapped by States. But Ms. Sitharaman stressed that States’ use of these funds is “not all all that disheartening as you would have inferred from the Survey.”  

“It was delayed in its launch a bit because States had to come up with proposals and then set it rolling… This year, it has been increased for two reasons . One we felt there was a good appetite for more funds and continuation of the scheme. That’s not possible if they [States] didn’t absorb it last year,” she said at a post-Budget interaction hosted by FICCI.  

Preferred projects

Moreover, she pointed out that a ‘good chunk’ of the ₹1.3 lakh crore loans on offer can be used by States on projects they prefer, while a portion of it will be conditional and linked to projects that encourage for instance, municipal bond issuances and building of Unity Malls in States’ capitals.  

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“Actually, this year, we have been talking through officials with the Chief Secretaries of State governments to see that this moves fast and early. My strong belief is that in the month of April itself, there should be a substantial number of proposals coming from many States so the release can happen straightaway, unlike last year,” she noted.   

“A lot of discussions have already happened with States on the contours of the scheme, the different features from the current year and if is it going to be very onerous to implement and so on. So all the differences have been ironed out,” the Minister said, adding that the Centre was pushing schemes that speed up capital expenditure while carrying forward critical reforms such as building accommodation for police personnel in the States. 

Also read |States may undershoot planned borrowings for Jan.-March: analysts

Interest-free loans for States with a tenure of 50 years to implement capital expenditure were first introduced by the government following the onset of the COVID-19 pandemic in 2020-21, starting with an outlay of ₹12,000 crore, which was raised to ₹15,000 crore next year. 

Construction of the Coastal Road Project in Mumbai.
| Photo Credit: PTI

The Budget comes at a time when the government faces a delicate balancing act between expenditure priorities and the need for fiscal prudence as it is the last full Budget before the general elections. From a macroeconomic standpoint, two areas were of concern: the fiscal deficit target for 2023-24 (FY24) and the allocation for capital expenditure (capex). On both counts, the Budget has stuck to the trajectory of previous years.

There are five issues that need to be analysed in this Budget — three from a growth and fiscal stability perspective and two from a welfare perspective.

Growth perspective

The first is continuity in the path of fiscal consolidation, which the Finance Minister has stuck to. The fiscal deficit ratio is to come down from 6.4% in FY23 to 5.9% in FY24, which means we’re on the path towards a fiscal deficit target of 4.5% of GDP by 2025-26. Here, the Finance Minister is guided by the logic that the economy has recouped from the pandemic shock and is on the path of growth, which means there is no further need for continued affirmative action. The fiscal deficit target assumes that the economy is on a relatively strong footing, with another year of healthy tax collections.

Editorial | A raft of concessions amid consolidation

However, global headwinds will continue to weigh in. A third of the global economy is expected to slip into recession in calendar year 2023, as per the International Monetary Fund. This may affect manufacturing and other related sectors and impact revenue collections.

On the expenditure front, the Budget has stuck to spending commitments for infrastructure and flagship welfare and subsidy schemes. The fiscal deficit of ₹17.8 lakh crore will be financed using short-term borrowings and the National Social Security Fund. Given the tight liquidity condition of the banking system, this will not exert pressures on the flow of funds.

The second is the question of infrastructure and capex. The government believes that the best way to sustain India’s growth, create more jobs and boost consumption is through high-multiplier capex. The increase in capex to ₹10 lakh crore is substantial and will be 3.3% of GDP as against 2.7% last year. This is also supplemented by the ₹79,000 crore on affordable housing on the revenue expenditure side. The States can continue to avail of long-term, interest-free loans for their capex needs, but within selected broad sectors. As in earlier years, the Centre has been doing the heavy-lifting here and has been trying to pass the baton to the private sector, to ‘crowd in’ with their share. How much of it comes is crucial for medium-term growth prospects.

Third, on the revenue front, the government has kept its ambition for growth in direct taxes moderate for FY24, after buoyant tax receipts in FY23 and FY22. The Budget has provided direct tax sops for individuals and MSMEs. However, this may not translate into higher consumption as it is an indexation of the lower tax brackets with inflation, which has been high in the recent past. In terms of combating inflation, the Budget is silent on two potential possibilities: issues related to GST, which are outside its purview; and tinkering the excise rate on fuel. On the revenue side, numbers pertaining to disinvestment and non-tax revenue are interesting. The Budget is persevering ₹51,000 crore for disinvestment and the target for FY23 has been lowered only to ₹50,000 crore. This means that we can expect some big tickets in the next two months. Regarding non-tax revenues, dividends from the banking sector, including the Reserve Bank of India (RBI), have been placed at ₹48,000 crore, that is, the transfers from the RBI may be lower in the coming year.

Welfare perspective

Fourth, for the social sector, the push for providing last-mile connectivity is the broad approach. The Budget takes the route of empowering women through self-help groups, which are mostly in rural areas. Ambitious programmes have been spelt out for this and the co-operative sector. But expenditure on the social sector does not register a quantum jump, though there is an increase in absolute terms with some new initiatives towards skilling in both education and health.

Fifth, the Budget nudges transitions from the old tax regime to the new, from conventional to digital agriculture, from fossil fuels to hydrogen, from natural to laboratory diamonds. These need long-term commitments and clear transition paths.

The test of the Budget would be on two counts. First, there are signs of improved balance sheets of both companies and banks, as we have come out of the twin balance sheet problems. This should translate into an upturn in the private investment cycle to generate more jobs. But the constraint is demand, as reflected in capacity utilisation, which is still around 75%. Hence, capex needs to percolate down to higher disposable incomes and increase demand.

Second, though we aspire for a lot of transitions, there is one important transition to make. As noted in the Economic Survey, 16.4% of the population is multidimensionally poor and an additional 18.7% is classified as vulnerable to multidimensional poverty. We need to transition out these two groups. Ultimately, that is sabka vikaas.

M. Suresh Babu is Professor of Economics at IIT Madras and is currently Advisor to the Prime Minister’s Economic Advisory Council. Views are personal