Author : Nilanjan Ghosh

Expert Speak India Matters
Published on Feb 05, 2024

The Interim Budget indicates that the economic thinking is in the right direction— India is slated to have capital-driven growth in the coming future.

An Interim Budget for the transforming economy

It is possibly easier to read out an interim budget in an election year for any dispensation than for analysts and economists to analyse it. This is more so because the interim budget, in no way, dictates the path of the economy for an entire year, but needs to be construed as a “make-shift” arrangement that may indicate either continuation of past policies or mark broad contours of the plans that a dispensation may undertake if incumbency continues. “Populism” often becomes a hallmark of an interim budget in an election year, which is readily interpretable. Therefore, for an existing dispensation the canons of an interim budget in an election year are very well etched out.

Finance Minister Nirmala Sitharaman just took a leaf from all the canons mentioned above. In the process, the Budget does not have anything that is dramatic or entails any paradigmatic shift from past trends. As such, given the present geopolitical and global economic scenario, that is not needed either. Indian economy is the best-performing economy among all the major economies, and according to Standard and Poor’s Global Credit Outlook 2024, the stage is set for India to emerge as the third-largest economy by 2030, with the economy’s projected GDP likely to grow from 6.4 percent in 2023 to 7 percent in 2026. If this is true, India is slated to emerge as the fastest-growing major economy in the next three years. Needless to say, the Indian economy has undergone a transformational change over the last few years, and it is still transforming!

So, all the FM needed to do at this stage is not to tamper with the growth parameters that have, by policy design or organically, already taken centre stage and driving the economy towards the avowed goal of collective prosperity. The vision of collective prosperity has been the key mantra of this dispensation and has been aptly summarised in the phrase: “Sabka Saath, Sabka Vikas, and Sabka Vishwas”. The phrase has been reverberated in this Budget as well.

In the Budget Speech, the FM emphatically mentions: “… Our development philosophy covered all elements of inclusivity, namely, social inclusivity through coverage of all strata of the society, and geographical inclusivity through the development of all regions of the country”.

Over the last few budgets, the government has made one thing clear: though its “growth-centricity” in the development vision remains, that is not at the cost of distributive justice and sustainability. Rather, on certain counts the last few budgets give a sense that the government is steadily thinking of growth being driven by human capital and natural capital, and should be sustained.  In the Budget Speech, the FM emphatically mentions: “… Our development philosophy covered all elements of inclusivity, namely, social inclusivity through coverage of all strata of the society, and geographical inclusivity through the development of all regions of the country”.   This is a significant vision of this dispensation, which emphasises regional development and the development of social capital through social mobility.

Therefore, the Interim Budget sticks to the very basics of the ‘Inclusive Wealth’ approach—nudging on all its four parameters—physical capital, natural capital, social capital and human capital. On the physical capital front, the Indian economy has been on a roll over the last four years by tripling the capital expenditure (capex) outlay for developing physical capital for connectivity and asset creation. In the Interim Budget, the outlay for the next year is being increased by 11.1 percent which is tantamount to 3.4 percent of the GDP. It is noteworthy that the multiplier effect of capex has been estimated at 1.5–3 times larger than revenue expenditure multipliers under various scenarios. Apart from the indications of the connectivity initiatives in terms of railway, metro, etc., what is important is that capex generally brings down the transaction costs of doing business and augments the business-enabling environment. On the other hand, social capital has been enshrined in the broader vision of “Sabka Saath”, thereby, making the poor empowered partners in the development process. This brings in the social justice and equity concerns that are embodied in Direct Benefit Transfer schemes using PM-Jan Dhan accounts. However, the important element of human capital seems embedded in youth and women skilling, empowerment and entrepreneurship. The tricky part of the natural capital has also been addressed through the concerns of green growth, e.g., EV ecosystem incentivisation, bio-manufacturing and bio-foundry, and most importantly, the blue economy.

On the physical capital front, the Indian economy has been on a roll over the last four years by tripling the capital expenditure (capex) outlay for developing physical capital for connectivity and asset creation.

Regional development as a factor of equity and efficiency

The Budget speech states: “… Our development philosophy covered all elements of inclusivity, namely,

  • social inclusivity through coverage of all strata of the society, and
  • geographical inclusivity through development of all regions of the country.”

The first part, ‘social inclusivity’, is purely a concern of distributive justice. The second part, ‘geographical inclusivity’, addresses both equity and efficiency concerns. The efficiency concern arises from the fact that the Budget Speech talks of the development of the eastern part of the country – regional development is important from an equity perspective, but here it is even more important as the eastern region harbours rich natural capital, and has a large pool of cheap human capital. This makes the eastern region a perfect hinterland to support the growth of the economy. More importantly, abundant and cheap human capital and natural capital can bring down the cost of production, enhance efficiency, and cater to the growing consumption demands of the comparatively richer western and southern parts of India. Further, this can also help India in using its competitive edge more prominently in the scenario of global business’ China+1 strategy.

Consumption, savings, and investments

The Interim Budget, quite logically, has not brought about any change in the tax structures. The tax benefits that are slated to expire by the close of March 2024 have been extended till March 2025. These involve the benefits given to the start-ups, sovereign wealth or pension funds’ investments, and the exemptions on certain income of some IFSC units. Further, the non-reconciled or disputed direct tax demands up to INR 25,000 for the period up to financial year 2009-10, and up to INR 10,000 for financial years 2010-11 to 2014-15 are withdrawn. This helps reduce the unnecessary hassles of honest tax-payers and brings down the cost of compliance.

Consumption as the sole growth driver ever since the liberalisation of the economy, does not augur well with the economy.

However, in the long run, it needs to be kept in mind that while the Indian economy has largely encountered consumption-driven growth so far, there is an utmost need to garner private savings to promote investments. Consumption as the sole growth driver ever since the liberalisation of the economy, does not augur well with the economy. There is an utmost need for domestic private investments and FDI to play important roles along with consumption. Therefore, while tax rationalisation and GST’s implementation, deepening, and broad-basing have played important roles, the importance of savings cannot be overemphasised. Therefore, though PM Jan-Dhan has been helping the cause of poors’ savings, it also needs to be remembered that savings propensity increases with an increase in disposable incomes and savings rates. The future India will need a multi-pronged growth strategy.

To conclude…

This Interim Budget can be summarised through two points. First, it is a continuation of what transpired over the years, but with an attempt towards fiscal consolidation. Given the sudden spike in fiscal deficit due to the shock of COVID-19, fiscal consolidation over time is a mandatory step. This Budget projects the deficit of 2024-25 at 5.1 percent thereby sending signals that the economy is well on its path to reducing the deficits below 4.5 percent. Second, the Interim Budget is an indication of what is in store in future if the ruling dispensation comes to power. It has some long-term goals to achieve for the Amrit Kaal, and therefore shorter milestones need to be achieved—it realises the importance of sub-national development for Viksit Bharat.

Rest assured that the economic thinking behind this Budget is in the right direction—India is slated to have capital-driven growth in the coming future. By capital, what is meant are the four forms: human, natural, social, and physical—and none can be substituted by the other.


Nilanjan Ghosh is a Director at the Observer Research Foundation

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Author

Nilanjan Ghosh

Nilanjan Ghosh

Dr Nilanjan Ghosh is a Director at the Observer Research Foundation (ORF) in India, where he leads the Centre for New Economic Diplomacy (CNED) and ...

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