Budget 'nudges' in the right directions

But much bolder and comprehensive reforms are needed

Modi 3.0’s first post-election Budget has tried to acknowledge the messages that the voters sent. Its focus on employment and skilling, rural distress, and small and medium enterprises, as well as the need to address factor-market distortions in labour and land, suggests this. It has maintained the priority on infrastructure that was the hallmark of budgets in Modi 2.0. And it does all this with further fiscal consolidation. These are all changes in the right direction. But will the multiple proposals and schemes announced be enough? My take is that much bolder and comprehensive reforms are needed.

The “nudge,” as Finance Minister Nirmala Sitharaman calls the employment incentive scheme proposed in the Budget to encourage firms to hire more labour, will, by itself, not make a big dent in unemployment. It allows firms to use 10 per cent of their corporate social responsibility funds — which could encourage its uptake. The increase in expenditure on skilling is also welcome. But what will create jobs on the scale India needs is more private investment in labour-intensive manufacturing sectors, not employment subsidies. Jobs will also come from massive increases in tourism-related services, which should get more attention. But recognising the issue of unemployment, instead of trying to underplay it, as was the case in the run-up to the election, shows that the government understands the problem.

The emphasis in the Budget on the need to address factor-market reforms — including labour, land and capital — working closely with the states, is welcome. What form this will take remains undefined but, if done right, it can have a huge impact on getting India on the path of employment-intensive growth. The focus on micro, small and medium enterprises (MSMEs) is also welcome, but tweaking benefits to MSMEs will only go so far if the ecosystem discourages their growth. According to the Periodic Labour Force Survey, almost 80 per cent of the workers are in firms with less than 10 workers. Labour laws largely explain why firms remain small — as most labour laws in India apply to firms employing more than 10 workers. The expensive production-linked incentive (PLI) scheme, which benefits mostly large firms and does not create too many jobs, has not been expanded, despite pressure from India Inc. It needs a review and a revamp, not more money.

With so many subsidies and schemes, the basic functions of government health, education and defence continue to remain underfunded. The increase in spending on agriculture research and development (R&D) and the focus on achieving self-sufficiency in oilseeds and pulses is welcome. But the bigger reasons for rural distress remain unaddressed and will remain so as long as not enough jobs are created outside agriculture. It will also require changes in the crop mix from cereals and sugar cane, which are soaking up huge subsidies, depleting the water table and degrading the soil in the north. But with the government having already announced free foodgrains for five years to over 60 per cent of the population, which will entail more Food Corporation of India procurement and doubling down on higher minimum support prices (MSPs) for foodgrains, serious agricultural reform will remain a challenge in Modi 3.0.

The momentum on infrastructure investment, a lodestar of budgets in Modi 2.0, has been maintained. But at the same time, the Budget signals more fiscal consolidation, with a projected deficit of 4.9 per cent of gross domestic product (GDP) for FY25, down from the target of 5.9 per cent of GDP in FY24. The target deficit of 4.5 per cent of GDP for FY26 now seems within reach. However, India needs a more aggressive medium-term fiscal consolidation glide path to reduce the public debt ratio closer to 60 per cent and prepare the fiscal space for the next big crisis. One way to do this, as I argued in my column last month, is a comprehensive privatisation programme, with the proceeds assigned to infrastructure investment.

The Budget increases the capital gains tax on long-term capital gains to 12.5 per cent (up from 10 per cent) and on short-term capital gains to 20 per cent (up from 15 per cent), bringing it more in line with international levels and affecting the financially wealthy sections of society.  It also correctly reduces the capital gains tax on property and gold from 20 per cent to 12.5 per cent — same as the long-term capital gains tax, with changes in inflation indexation, hopefully making property transactions more transparent. Ending the bizarre angel tax is a good move and may revive startup activity. The standard deduction on income tax was raised to Rs 75,000 and the tax slabs were increased to provide some relief to middle-income taxpayers. But only 2.2 per cent of the adult population pay income tax — widening that base is needed.

The move to reduce import duties or to eliminate them for items such as mobile phones, selected medical equipment, critical minerals, capital goods for use in solar energy, inputs into leather and textile production and exports, and metals is a positive step and reverses five years of tariff increases introduced in Modi 2.0. It also signals the realisation, I hope, that if India is to be an exporting powerhouse, then higher import tariffs, especially on intermediates, will hurt rather than help.

Special allocations for projects in Andhra Pradesh and Bihar, as expected by the imperatives of a coalition government, were in the Budget and given considerable emphasis in the finance minister’s speech. But at least these two states were not accorded a special status, which would have opened the door to demands from other states, now and in the future. The coalition parties of the Bharatiya Janata Party  — the Telugu Desam Party, and the Janata Dal United  seem satisfied for now. But whether they will be so in the future remains to be seen?

The finance minister laid out the Budget as a Modi 3.0 blueprint for the next five years on India’s journey to Amrit Kal. The Budget “nudges” in the right directions, but more fundamental reforms and changes will be needed if India wants to turn jobless growth into employment-intensive growth and achieve the Viksit Bharat goal by 2047.

The writer is distinguished visiting scholar, Institute for International Economic Policy, George Washington University, and co-author of  Unshackling India, declared the Best New Book in Economics for 2022 by the Financial Times