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Finance Minister Nirmala Sitharaman balances welfare and jobs with growth and private sector incentives
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This essay is part of the series "Budget 2024-25"
With a political mandate that is dependent on partners, Finance Minister Nirmala Sitharaman’s seventh Union Budget expresses a mature balance. It has quickly shifted from its pre-elections stance of all being well, and has focussed on the underlying political narrative handed to it by Mandate 2024—jobs. Budget 2024 has leaned heavily on creating policies and funds to incentivise and finance job creation by the private sector. In the process, it has worked backwards to make doing business easier and has announced next generation reforms. Step back from the noise and we note that reforms and financial incentives will nudge companies, large and small, to create jobs, expand or build enterprises, and—through them—deliver growth.
While talking about economic reforms, the narrative is political. Sitharaman places the scope of the next generation of reforms as “facilitating employment opportunities”. Amongst these, it is heartening to note that, apart from the usual land-labour-capital as factors of production, she has included entrepreneurship and technology as new factors. This is the first time that entrepreneurship has been seen to be and included as a factor of production. As we all know, the first three factors of land, labour and capital cannot work together without the entrepreneur. Bridging labour to jobs is a huge skilling proposal that includes financing internships in India’s top 500 companies and expands the scope of CSR (corporate social responsibility) funds to skilling and interning.
As we all know, the first three factors of land, labour and capital cannot work together without the entrepreneur.
As a subject that comes under the domain of state governments, Sitharaman has preserved the constitutional sanctity of land. Budget 2024 seems to nudge state governments to work towards an idea that was born decades ago but whose time, it seems, has come. She proposes a Unique Land Parcel Identification Number or “Bhu-Aadhaar” for all lands; digitisation of lands; the establishment of land registry; and linking it to the farmers’ registry. Such an infrastructure could help in credit flows. In urban areas, she proposes an IT-based system for property record administration, updating, and tax administration.
In a related policy continuity proposal, Sitharaman mentions the ongoing Jan Vishwas Bill 2.0 to enhance the ease of doing business. Last year, Parliament had enacted the Jan Vishwas (Amendment of Provisions) Act, 2023, which decriminalised 183 provisions, of which 113 applied to doing business—a good start. But when placed in context, these account for less than the tip of an iceberg: It is 0.4 percent of the total 26,134 imprisonment clauses businesses face—26,021 clauses remain to be rationalised.
The remit of the Union government is limited to 5,239 clauses, with the balance under State governments. The fact that an entrepreneur can be jailed for doing business has become a tool for rent seeking and corruption in the hands of the bureaucracy. Rationalising and reforming compliances—a low hanging seed to attract capital and entrepreneurs, and deliver growth—will go a long way in energising business. Jan Vishwas 2.0, therefore, needs to be bolder and wider. Appending it to jobs will create the narrative space. On her part, Sitharaman decriminalises one clause around delays paying tax deducted at source.
Budget 2024 takes three small but crucial steps towards a future-ready India. First, it announces a Critical Mineral Mission that would enable domestic production, recycling and overseas acquisition of critical mineral assets. Much of India’s energy transition endeavours depend on the availability of critical minerals such as Gallium, Molybdenum and Cobalt. Second, it catalyses the setting up of small nuclear reactors. This, it proposes to execute in partnership with the private sector. And third, she proposes a five-fold expansion of the space economy over the next 10 years. For this, she proposes a INR 1,000 crore venture fund.
Budget 2024 takes three small but crucial steps towards a future-ready India.
Small tinkering around income taxes continues. Sitharaman has reduced the number of slabs from 11 to six. You could quibble as to why there are three slabs between INR 7 lakh and INR 15 lakh, but it is not a deal breaker. Standard deduction has been raised to INR 75,000 from INR 50,000. With this, Budget 2024 has provided symbolic relief to the middle class. But the issue of widening the tax base remains unresolved. Perhaps, it will never come.
Further, Budget 2024 simplifies and rationalises capital gains taxes. Short term gains will be taxed at 20 percent, long term at 12.5 percent. The definition of long- or short-term has been rationalised for financial assets: Listed assets go long term after one year, unlisted and non-financial assets after two years. This is a surface level change. What’s needed is an overhaul of capital gains itself. For now, equity investors will pay 2.5 percentage points higher tax, while real estate investors will pay 7.5 percentage points lower. But since the indexation benefit has been removed from real estate, such investors will end up paying a lot more. In a way that’s good, as it leads to a greater financialisation in the economy. Further, Sitharaman has abolished the ‘angel tax’ that applies to unlisted companies and has been harassing start-up financing for years.
In the final chunk on the taxes front, Sitharaman proposes a comprehensive review of the Income-tax Act, 1961 over the next six months, before her next Budget on 1 February 2025. The objective is to make it “concise, lucid, easy to read and understand”, such that it reduces the accompanying disputes and litigations, and provides “tax certainty to the taxpayers”. It will also bring down the demand embroiled in litigation. But given the tyranny of tax targets on the one side and unchecked corruption and unaccountable bureaucracy on the other, this may be easier said than done. On the procedures side, Sitharaman walks the talk by proposing that an assessment can be reopened after three years only if the income is INR 50 lakh or more and up to a maximum period of five years.
At the macro level, Budget 2024 delivers some interesting numbers. First, the share of interest payments—the biggest expenditure—has fallen to 19 percent, down 1 percentage point. This must continue. Second, deficit numbers are down: Fiscal deficit stands at 4.9 percent (down 0.7 percentage points), while revenue deficit is at 1.8 percent (down 0.8 percentage points). The Budget Size stands at INR 4.8 lakh crore, up 7.3 percent over the previous year. Irrespective of the economy, India’s Budget has been growing at a compounded average annual rate (CAGR) of 11.1 percent.
The growth in government spending has surpassed the growth of the economy. Further, the growth of income tax on individuals, at 15.4 percent to INR 11.9 lakh crore has grown faster than even the Sensex, and has surpassed the INR 10.2 lakh crore corporation tax. This is an anomaly that needs to get fixed by expanding the tax base—the fact that merely 1.6 percent of individuals pay taxes may sound politically fulfilling, but is creating angst among taxpayers and throwing an unfair burden on them. The tax collected at source for Indians spending abroad is another ridiculous cash flow burden on those in the tax net. Budget 2025, six months later, must end the latter and work on the former.
The growth in government spending has surpassed the growth of the economy. Further, the growth of income tax on individuals, at 15.4 percent to INR 11.9 lakh crore has grown faster than even the Sensex, and has surpassed the INR 10.2 lakh crore corporation tax.
Budget 2024 misses one huge opportunity around disinvestment of public sector enterprises. In February 2021, Sitharaman had announced a policy on strategic disinvestment. Under this policy, four sectors—atomic energy, space and defence, transport and telecommunications; power, petroleum, coal and other minerals; and banking, insurance and financial services—would be strategic and have “bare minimum” public sector presence, with the rest being in the private sector. The rest would be privatised, merged or shut down. In the past 12 months, the value of 30 central public sector enterprises has more than doubled to more than INR 50 lakh crore (about US$ 600 billion). This would be a good time for the government to divest a part or go for strategic sales of some public sector enterprises.
Overall, Sitharaman manages the political narrative around jobs but keeps economic reforms going. Budget 2024 delivers policy continuity around Prime Minister Narendra Modi’s convictions for reforms even as it negotiates political consensus with Andhra Pradesh and Bihar. This will be the political economy direction of India over the next five years.
Gautam Chikermane is Vice President at the Observer Research Foundation.
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Gautam Chikermane is Vice President at Observer Research Foundation, New Delhi. His areas of research are grand strategy, economics, and foreign policy. He speaks to ...
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