Presenting her seventh Union Budget and the first after this year’s Lok Sabha election, Finance Minister Nirmala Sitharaman on July 23 unveiled a flurry of measures aimed at fixing the woes of unemployed youth, small businesses, and the middle class, and sought to strengthen the ruling NDA coalition’s bonds with support for multiple investment projects in Bihar and Andhra Pradesh.

Ms. Sitharaman proposed income tax rate cuts worth up to ₹17,500 a year, putting an extra ₹1,458 a month in the hands of those earning upto ₹12 lakh a year, and hiked standard deductions for salaried taxpayers and pensioners by ₹25,000 and ₹10,000, respectively. She also promised to spend ₹2 lakh crore over five years on five schemes which are part of what she called “the Prime Minister’s package”, aimed at spurring jobs and imparting skills to 4.1 crore youth.

Changing lanes

This marked a shift in strategy, or rather a frenetic changing of lanes ahead of a roundabout as drivers in the capital are prone to do, from the previous government’s preferred reliance on letting multiplier and trickle-down effects work while avoiding direct handouts to such sections of society. A similar lane change was last seen when Ms. Sitharaman’s predecessor, the late Arun Jaitley, presented his third Budget, for 2016-17.

Seeking to shed the “suit-boot sarkar” label used by the Opposition at the time, Mr. Jaitley had dedicated that Budget to the farmers, the poor, and vulnerable sections of society and switched his focus to the rural economy and job creation. The trigger for the shift, this time, could be the BJP’s electoral reverses after a decade of outright majority in Parliament, preceded by revelations such as big businesses’ electoral bond purchases.

Jobs, jobs, jobs

At a briefing after her roughly-90 minute speech, which appeared to acknowledge and begin addressing the perceived disenchantment among specific voter groups like the young, the salaried class, farmers, and small entrepreneurs, Ms. Sitharaman made it clear that the overarching theme of Budget 2024-25 was ‘EMPLOYMENT’. Used as an acronym, the theme was spelt out — Employment and Education; Micro, Small and Medium Enterprises (MSMEs); Productivity; Land; Opportunities; Youth; Middle Class; Energy Security; New Generation Reforms; and Technology.

Her speech referred to ‘employment’ 23 times, up sharply from three mentions of the word in the 2023-24 Budget, and seven (four of which were about past achievements rather than the future) in the Interim Budget presented this February. ‘Jobs’ featured four times in relation to new schemes, compared with just one mention in the pre-poll Interim Budget. Similarly, there were three references to the middle-class, from just one mention in the Interim Budget and two in 2023-24.

Shift in priorities

References to growth slipped to 10, from a combined 34 mentions in the last two Budget speeches. Mr. Jaitley’s third Budget had also slashed growth references, but the similarities with that speech don’t end there. While he had released a plan to ‘Transform India’ based on action points around nine pillars, Ms. Sitharaman on Tuesday laid out nine priorities for generating ample opportunities for all. Five of those are, in fact, similar to Mr. Jaitley’s list that led with the promise to double farmers’ incomes in five years. Ms. Sitharaman said that her first priority would be to raise productivity and resilience in agriculture, followed by employment and skilling, inclusive human resource development and social justice.

Infrastructure and next generation reforms also figure in the priorities, with the Minister promising more details about the latter through an economic policy framework to be formulated later, with a focus on fixing factors of productivity, including land, labour, capital, and entrepreneurship. She also announced a review of the Income Tax and Customs Acts, a simplification of Foreign Direct Investment (FDI) norms, and a financial sector vision document for five years.

Fiscal consolidation

While investors will need to wait for those details, the Finance Minister did provide some indirect support to private investments by accelerating the fiscal consolidation process, armed with a ₹2.1 lakh crore surprise dividend from the central bank. The fiscal deficit target for this year has been pegged at 4.9% of GDP from the 5.1% projected in the Interim Budget, and the 5.6% of GDP achieved last year. A reduction in the government’s market borrowings would facilitate a reduction in policy interest rates and encourage private investment, EY’s chief policy advisor D.K. Srivastava pointed out.

Among the PM’s employment package schemes is a plan to provide one year internships in 500 top companies to one crore youth over five years. It is not clear if this will subsume the Pradhan Mantri Kaushal Vikas Yojana 4.0 that was announced in the last Budget to “skill lakhs of youth within the next three years” with an on-the-job training component.

As is the case with many initiatives of this Budget, more details will emerge over time. But Ms. Sitharaman, who began her speech by thanking the people of India for re-electing a government led by Prime Minister Narendra Modi, will be hoping that the lens change reflected in the Budget’s focus areas will not be lost on voters gearing up to cast their ballots in the upcoming State Assembly elections.

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.

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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