Overall, the Budget has its pluses and minuses – but there is no denying that it keeps in mind the longer-term vision of India’s grand plan of Viksit Bharat
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This essay is part of the series "Budget 2024-25"
Finance Minister (FM) Nirmala Sitharaman presented the Union Budget 2024-25 today, surpassing the record of former Prime Minister Morarji Desai of delivering the maximum number of budgets. This budget, being the first one by the BJP-led NDA government since its re-election, was expected to continue with the vision laid down by Modi 2.0. And it went as expected. If one reads the previous budget speeches presented by the FM after the COVID years of 2020-21 and 2021-22, one finds a few common principles based on which the development paradigm has been delineated. One is the Sustainable Development Goals (SDGs); the other addresses the critical challenges of global development governance amidst the global “polycrisis”—a conjunction point of multiple crises entailing the pandemic, the Ukraine-Russia turmoil, supply-chain bottlenecks, etc. The third is the internal dynamics of the economy, which addresses the trade-off between the normative pillars of efficiency, equity, and sustainability. This budget is no exception.
Finance Minister (FM) Nirmala Sitharaman presented the Union Budget 2024-25 today, surpassing the record of former Prime Minister Morarji Desai of delivering the maximum number of budgets.
The last three decades in India witnessed consumption-driven growth, though in the last fiscal year, the co-movement of consumption growth and GDP growth seemed to have snapped with GDP growing at 8.2 percent, while consumption grew at only 4 percent. Rather, economic growth seems to have been spurred by growth in gross fixed capital formation or investment, which grew by almost 9 percent. In any case, households are the prime movers in the case of both consumption-driven growth as also for the creation of the largest pool of investible funds in the Indian economy. Private consumption expenditure constitutes more than 55 percent of the GDP, while households are the largest drivers of fixed capital formation in the Indian economy, accounting for over 60percent of gross national savings. In other words, more money in the hands of households will only spur growth—a lower-income household with a high marginal propensity to consume (incremental amount spent on consumption demand with incremental income) will spend on consumption, while a higher-income household with a high propensity to save (or low propensity to consume) will save in the form of financial or non-financial savings and create the investible fund pool of the economy. There was therefore an expectation that there would be benefits on personal income taxes that would reward the household for their contribution to growth and would spur more growth.
The tax relief came, though not in the form expected. The relief will be more visible for lower income households with the increase in the standard deduction levels, and the redefinition of the tax slabs. Of course, this will have some positive impacts on growth, though the expectations of creating more “investible funds” from the household savings pool to finance investment demand might not be satisfied. That would have happened had the 30 percent tax slab would have begun from the range of at least INR 20-25 lakhs, rather than INR 15 lakhs.
The tax relief came, though not in the form expected. The relief will be more visible for lower income households with the increase in the standard deduction levels, and the redefinition of the tax slabs.
What is commendable about this Budget is the nine priorities that have been put forward in the following forms: a> Productivity and Resilience in Agriculture; b> Employment & Skilling; c> Inclusive Human Resource Development and Social Justice; d> Manufacturing & Services; e>Urban Development; f> Energy Security; g> Infrastructure; h> Innovation, Research & Development and h> Next Generation Reforms.
In this context, a few of them deserve mention from the perspective of the great future that the Viksit Bharat vision—India's ambitious vision to catapult the nation into a developed economy—intends to unfold by 2047. The first is concerned with agriculture. Only yesterday, in a critical article, it was stated that the Economic Survey 2023-24 did not talk much about agricultural productivity but delved more into agricultural marketing. Probably, to bridge that lacuna, the Budget has talked about agricultural productivity. The Budget has talked about innovation and research and development, while especially highlighting the need for climate-resilient and high-yielding crop varieties. Over time, there will be an utmost need to promote such crops through the support pricing mechanisms. The process has already begun in India with its mission of promoting millets in various ways, including changing the terms of trade through minimum support prices in favour of these less water-consuming crop varieties and against high water-consuming crops like paddy and maize.
However, there is a critical need to promote better institutional mechanisms through market integration efforts driven by digitalisation. Else, the entire allocation of INR 1.52 lakh crore will go in vain.
An important pillar of this Budget is the honest intent to capitalise on the existing demographic dividend and promote human capital through education, health, and skilling. This is a welcome move by all means. India’s large labour pool often fails to cater to the present and future needs of the growing economy because of a lack of skill sets—something that has hindered the employment scenario as well. The emphasis on education and skilling will go a long way to convert the labour pool to the much-needed pool of human capital that will account for the quality of the labour force and will explain the varying productivity across space, ceteris paribus. However, what stands out in this entire scheme of things is employment-linked incentives (ELIs) to firms based on enrolment in the Employees’ Provident Fund Organisation (EPFO). Therefore, while Production-linked incentives (PLIs) have worked on the product side, ELIs will address the factor side. On the one hand, this addresses the concern of efficiency by creating an efficient workforce, and equity and distributive justice through job creation on the other. There is no doubt that the emphasis on human capital is praiseworthy and futuristic and addresses a crucial gap of the Indian economy as it aspires to progress towards Viksit Bharat.
At the same time, the Budget deserves to be lauded for the important steps that it has taken for MSMEs, women empowerment, and also women entrepreneurship. The Credit Guarantee Scheme and Credit Support schemes during vulnerable periods for MSMEs are important in this context. However, what would be important here would be to make the MSMEs more competitive than they are. Given that India has been signing Free Trade Agreements (FTAs) and Comprehensive Economic Partnership Agreements (CEPAs) with nations and attracting foreign investment, the MSMEs will be up for competition. They need to step up their game through better productivity norms and managerial practices.
The Budget deserves to be lauded for the important steps that it has taken for MSMEs, women empowerment, and also women entrepreneurship. The Credit Guarantee Scheme and Credit Support schemes during vulnerable periods for MSMEs are important in this context.
On the other hand, under the MUDRA scheme, the enhancement of the loan limits to INR 20 lakhs from the existing 10 lakhs will prove beneficial not only for the MSMEs, but also in the Budget’s attempt to promote women's entrepreneurship. One needs to remember that for a large nation like India, the best way to create jobs is through the multiplier effect of entrepreneurship. Further even, the women workforce, which can enhance the overall efficiency of the economy, can also be effectively and gainfully tapped with women entrepreneurship.
In another context, the Budget has talked about green finance, emphasising the need for adaptation along with mitigation, and the drafting of a green taxonomy accommodating both. This is a welcome move by all means. This shows that while the Indian economy pretty well recognises its global responsibilities, it is not oblivious to its immediate developmental needs of adaptation financing for vulnerable regions and communities.
The Budget estimates of the fiscal deficit stand at 4.9 percent of the GDP, which, if performed, will exhibit a better performance than the existing 5.1 percent. The Budget speech also mentions that the attempt will be to reduce the fiscal deficit to 4.6 percent by 2025-26. Where will this revenue come from? The rationale of increasing the Securities Transaction Tax (STT) is not clear here. The Budget proposed “… to increase the rates of STT on sale of an option in securities from 0.0625 per cent to 0.1 per cent of the option premium, and on sale of a futures in securities from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded”. From a percentage increase perspective, this increases the transaction cost by 60 percent on futures. As it is, the contribution of STT in tax revenue is less than 1 percent. There is a possibility of lafferisation in the securities market, where a tax rise can result in a decline in transaction volume, which, in turn, can also result in tax revenue decline. Further, it is not clear whether the definition of “securities” applies only to the equity market, or also includes the commodities markets. If it is the latter, then the hedging cost of non-agricultural commodities will go up further.
Overall, the Budget has its pluses and minuses – but there is no denying that it keeps in mind the longer-term vision of India’s grand plan of Viksit Bharat. Over time, the economy has to make both the forces of consumption and investment work with substantial emphasis on the services and manufacturing sectors. The vision of a developed India can be achieved when all the growth forces are made to work and the development paradigm ably addresses the concerns of sustainability and distributive justice along with efficiency principles.
Nilanjan Ghosh is a Director at the Observer Research Foundation.
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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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