Budget 2024-25, Reflecting the Altered Realities

Given that we have a chastened, yet fairly entrenched ruling dispensation, it was not surprising to find sycophants galore trying to out-do each other in singing the virtues of the first budget of the Modi 3.0 regime. This is not to say that the budget is devoid of any positives. Despite pressures of a coalition government, the budget has traversed the path of fiscal consolidation with fiscal deficit coming at 4.9% of GDP as against 5.6% as per provisional actuals for 2023-24. But at the core, the latest budget is an acknowledgement of some economic trends that got highlighted during the election campaign which have evolved into major concerns over the last few years.

The GDP forecast of 6.5 to 7% for FY 2024-25 is realistic and conservative, but it still makes India as the fastest growing large economy. However, underlying this robust growth is a rising unease about the distribution of benefits. Data on income and wealth inequality, particularly over time, are scarce and disputed and the budget, ostensibly, was forced to recognize the “jobless growth”. Despite capex push in the budget, improving profitability of corporates thanks to lower taxes and falling commodity prices and adequate credit from the now healthy banking system, there has not been enough investment in the private sector and the usual virtuous cycle of investment-consumption-investment led growth seems to be broken. The reason has to be found in the sluggish household consumption given the massive unemployment/underemployment which coupled with rising inflation has eaten into the already lower disposable incomes, particularly of rural families which has deterred the companies from investing in additional/new capacities in the absence of adequate demand.

Bureaucrats (regulators included) are quick to find alibis for the failure on the job front by expressing concern that retail money is increasingly flowing from bank deposits into capital markets, which in their parlance is an euphemism for speculation. While there appears to be merit in the SEBI Chairperson’s  observation that retail money in the stock markets is fuelling speculation instead of capital formation, one is hard put to appreciate RBI Governor’s  concern about money flowing into mutual funds at the expense of bank deposits. RBI would do well to have a look at its own data. As per report put out by Jeffries as of March 2023, 15.5% of the total Indian household assets are in gold, second only to real estate which accounts for 50.7%. Bank deposits (14%), insurance funds (5.9%), provident and pension funds (5.8%), equities (4.7%) and cash (3.4) make up the rest. RBI seems to be chasing shadows. A more meaningful action plan to follow for the central bank, would be to be first recognize that the level of service at the banks leaves much to be desired, with its own Ombudsman scheme far from being effective or efficient. Worse still, with banks offering interest rates that hardly cover prevailing inflation on post tax basis, only the ignorant or those with really low risk profile would go for bank deposits.

It is encouraging to see a pragmatic “compromise” emerging from the minority BJP government’s budget. To begin with it got its “neutral” expert, Mr. V. Anantha Nageswaran, Chief Economic Advisor to state some hard truths on the eve of the budget. His Economic Survey points out that India needs to create 8 million non-farm jobs annually till 2036. He also makes a case for seeking more investments from China to boost manufacturing. Quite a game this is!  They have got a bureaucrat to record these observations in a far less sensational document, which the “manthries” themselves would hardly dare make in public. The observations are welcome, nevertheless.

The budget has been compelled to rise above the statistical gimmicks of the past. One umbrella that has been hiding both open and invisible unemployment has been the amorphous categories of self employed and casual labour.  Allocations of Rs 2 lac crores for job creation over the next 5 years is a humbling though happy acknowledgement of the urgency to tackle pervasive unemployment/underemployment. The action plan comprises incentivizing hiring in the formal sector by contributing to employees’ first month’s wages and reimbursing some of the employers’ social security contributions. It also includes new training/skilling programmes for women. More encouraging was the fact that the budget has not even hesitated to borrow from the Congress party’s election manifesto when it came to proposing a scheme to provide internship at the top listed companies for 1 crore young people.

Agriculture which contributes around 15% of the GDP but employs 45% of the country’s 56.5 crore work force, has been the other focus area. Provision for agriculture and allied sectors is estimated at Rs 1.52 lac crores. It is planned to expand digital public infrastructure to link farmers with digital land records and crop surveys and give them better access to information such as market prices. The government has also pledged to introduce high yielding, climate resilient crop varieties. But the budget seems to have conveniently forgotten government’s promise to double farmer income. There was no announcement of any increase in PM Kisan which stays at Rs 6000 per farmer. May be the expectation is that higher productivity, better R&D, technology and easier and better informed access to market will result in better incomes. A budget of hope for the farmers?   

The budget has had to reflect the altered political reality. Having failed to acquire absolute majority, the BJP had to rely on coalition partners to stay afloat and the partners have demanded their pound of flesh. Bihar ruled by JD(U) one of the allies, has got Rs 26000 crores for development of road connectivity and Rs 21400 crores for 2400 MW plant at Pirpanti, apart from assistance for new airports, medical colleges and sports infrastructure. In the south in Andhra Pradesh, TDP of Chandrababu Naidu, the other crucial ally, got a commitment in the budget to facilitate financial support through multilateral agencies of Rs 15000 crores for the new capital city of Amaravathi and funds for early completion of Polavaram Project with promise of more assistance in the coming years.

There was little for the middle class to celebrate other than tinkering with the tax slabs under the new tax regime and paltry increase in standard deduction. For investors there were some pain points in the increase in capital gains tax and Securities Transaction Tax on derivative transactions.

Capital expenditure outlay of Rs 11.11 lac crores, a growth of 17% is retained from the interim budget

Despite the largesse to the coalition partners and capital outlay of 3.4% of GDP, Finance Minister Nirmala Sitharaman’s budget has managed a modus vivendi, thanks largely to the increasing contribution from tax payers and a windfall of Rs 2.1 lac crores from the RBI. Hopefully the rating upgrade could be round the corner further reducing cost of borrowing for the country.