‘There is a display of intent to continue to consolidate fiscal position well beyond FY26’
| Photo Credit: PTI

The FY25 Union Budget has sent out a strong message under the new administration — there remains an unequivocal focus on stability (fiscal) and continuity (of sustainable growth impulses) amidst a new chiselled focus on providing growth a more inclusive character in India.

Focus on ‘weaker building blocks’

The 8.2% GDP growth in FY24, while commendable, was driven by an uneven K-shaped segmentation. The premiumisation of consumption, as seen in the robust demand for luxury cars, houses and goods, coincided with stagnant wages, low fast-moving consumer goods sales and (food) inflation continuing to vociferously bite those at the bottom end of the income pyramid. The fiscal deficit, at 5.6% of GDP in FY24, still high compared to pre-COVID-19 pandemic levels, provided the needed growth impetus via capital spending at a time when the private capex cycle remained much on the sidelines. Against this background, the FY25 Budget, through a panoply of measures, has addressed the weaker building blocks, viz. to improve the quality of employment, fortify agriculture and bring in the micro, small and medium enterprises (MSMEs) into a meaningful roleplay in India’s manufacturing renaissance. This will pave the path to establish a Viksit Bharat by 2047.

From an agriculture perspective — currently a key priority — promotion of Atmanirbharta in pulses and oilseeds, a focus on agriculture research (bearing in mind the realities of climate change), large-scale clusters for vegetable production, and Digital Public Infrastructure (DPI) in agriculture for coverage of farmers and their lands, are all likely to support the Annadata (i.e., farmer). A thriving agriculture sector will allow the government to deliver on its promise of foodgrains under the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY), now extended for five years.

On employment generation

The Budget entailed an energised focus on employment generation, for the youth especially, within the ambit of the formal workforce. A new scheme offering incentives to employers as well as employees who join the workforce for the first time, was announced at an outlay of ₹10,000 crore through the Ministry of Labour. Other fresh schemes incentivising internships with an outlay of ₹2,000 crore, and for skilling youth in collaboration with State governments and industry were envisaged. This somewhat resonates with the tripartite compact (between Centre, States, private sector) that the Economic Survey had recommended on the eve of the FY25 Union Budget to deliver on the rising aspirations of Indian youth.

Outlay towards housing saw a massive jump in the FY25 Budget. For urban Pradhan Mantri Awas Yojana (PMAY), the government allocated 37% more funds in FY25 versus FY24, which though impressive, pales into some degree of insignificance when compared to the 70% jump budgeted for the rural counterpart of the scheme. Housing for all remains a key hallmark of the government, which now embarks on its version 2.0.

The PLI Scheme too got a handsome raise of 75% in the FY25 Budget, driven by higher allocation to the auto sector. This was accompanied by tweaks to sectoral custom duties in a bid to support domestic manufacturing and deepen local value addition. Financing constraints, typically faced by MSMEs, were addressed via promise to facilitate term loans to MSMEs for purchase of machinery and equipment without collateral. To facilitate improved and undisrupted lending, banks will now be allowed to develop in-house credit assessment and a facilitation backed by the government to continue to extend credit to MSMEs even during stress times.

Most of these measures will dovetail handsomely with the macro focus of pushing a job-led growth in the medium term. Commendably, the government has succeeded in maintaining the fiscal discipline whilst extending a wide gamut of measures to stimulate the economy.

Looking ahead

Compared to the interim Budget’s fiscal deficit estimate of 5.1% of GDP, the government pruned the FY25 headline deficit target to 4.9%. It kept the intended 70 Basis points consolidation over FY24 intact, as in the interim Budget. This allows for a smoother transition to 4.6% fiscal deficit to GDP in FY26.

The display of intent to continue to consolidate its fiscal position well beyond FY26, preserves the trust that this government has earned from economy watchers in the last few years, despite facing the pressure of new demands by regional partners.

While the capex target was left unchanged at ₹11.1 trillion, the gains from the Reserve Bank of India’s transfer of a record high dividend of ₹2.1 trillion earlier this year were divided between higher welfare spends and a reduction in fiscal deficit.

All this will serve India well, at a time when domestic bonds have embarked on a maiden journey of getting included in global bond indices. In the face of greater scrutiny of India’s fiscal metrics by international agencies, now more than ever, an adherence to fiscal discipline prepares the groundwork for the possibility of a sovereign rating upgrade in the future.

Yuvika Singhal is Co-Head, Research, QuantEco Research. Shubhada M. Rao is Founder, QuantEco Research

‘The Budget is not just a revenue and expenditure statement of the government’
| Photo Credit: Getty Images/iStockphoto

Union Finance Minister Nirmala Sitharaman is to present the Union Budget next week, on July 23. This time the government is a Bharatiya Janata Party (BJP)-led coalition government. The Budget is not just a revenue and expenditure statement of the government. It has to be understood as representing the policy and the politics of the incumbent government.

Unlike in 2019, when the BJP had 303 seats in the Lok Sabha, it now has 240 seats. Coalition politics and the aspirations of the regional coalition partners cannot be ignored. The reduced seat tally for the BJP could suggest a resentment with and dissent against the economic policies adopted by the government during its second term in 2019-24. The general election this time was termed as ‘normal’, implying that the focus of the election campaign was around ‘bread and butter’ issues, unlike in 2014 and 2019, where it was said to be aspirational and emotive issues.

The electorate seems to have very effectively conveyed its disappointment with the government in being able to address its concerns and anxieties. Therefore, this Budget is being keenly watched.

Employment issue as a poll plank

One of the major campaign planks in the 2024 general election was unemployment, concern about inflation and questions around social and economic justice. Employment, especially, can be seen as directly or indirectly holding centrality in addressing other questions from an economic vantage point. So, what might the Budget do in addressing this objective? Economists who hold allegiance to the Chicago School of thought and its mezzanine version reiterated by those in Columbia University have already expressed aggressive opposition to the thought of the government attempting to generate employment opportunities. By implication, this targets the potential allocations for the already neglected Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) programme as well as the demands for a similar programme for the urban unemployed.

One has to understand that the MGNREGA is an outcome of the failure of the neoliberal development policy in terms of generating employment through the private sector or the market. Recent reports on employment, by the Centre for Monitoring Indian Economy Pvt. Ltd. (CMIE) and the International Labour Organization and the Institute for Human Development, have highlighted concerns with the problem of employment in India. The reports point out, with varying levels of intensity (on account of different methodologies), to the very high levels of underemployment; unemployment among youth (15-29 years); and especially among the educated youth (above secondary school education). In addition, the real incomes of the regular employed have seen a contraction, perhaps on account of high levels of informalisation and poor quality employment. On the other hand, while the incomes of casual labour have increased, this could be on account of MGNREGA and other social programmes of the government.

While the participation of women in the labour market has increased, it is more as unpaid family labour and odd service activities to supplement household incomes. These challenges are being faced alongside structural retrogression in terms of employment, implying that contrary to the orthodox imagination, there has been an increase in primary sector employment and a contraction in secondary sector employment. This is on account of the significant contraction of the unorganised sector, especially the micro, small and medium enterprises (MSMEs).

MSME sector contraction

The MSME sector has significantly contracted on account of at least three shocks — demonetisation, Goods and Services Tax (GST) and the COVID-19 lockdown. This sector requires special attention in this Budget and the sector needs a nuanced understanding. Earlier Budgets have focused on infrastructure (CAPEX), skill-based programmes, credit for start-ups and fiscal prudence to generate employment. Most of these interventions have had supply-side policy bias as well as served high-value end activities. In the MSME segment as well, the government’s emphasis has been on those MSMEs which are export oriented, given that high-value production and the infrastructure sector together with enterprises having foreign direct investments and export-oriented sectors have had high value-added but very low employment elasticity. The focus, therefore, has to change from prioritising growth for growth’s sake towards avenues generating employment and inclusive growth.

Where the focus should be

Social and economic justice should not be reduced to hollow cliché. This Budget has to focus on MSMEs which cater to the domestic consumption of low-income groups, which are also socially marginalised groups. Further, given the poor performance of India on the Human Development Index and Multi-Dimensional Poverty Index (MDPI), education, health, and housing for the deprived sections ought to find higher allocations combined with employment-generation objectives in this Budget. The rhetoric in the recent past, of India having become the fifth largest economy and on the path to develop into the third largest economy, has coexisted with the nagging problem of joblessness and poor quality employment growth — witnessed right from the mid-1990s. While political machinations show no mood towards a rethink, perhaps wanting to project the optics of continuity, let us hope that such misplaced confidence does not carry into the Budget as well.

G. Vijay is faculty member, School of Economics, University of Hyderabad